The Determinants of Foreign Direct Investment in Sub-Saharan Africa: What Role for Governance?

30 Pages Posted: 21 Aug 2017

See all articles by Andrés Rodríguez-Pose

Andrés Rodríguez-Pose

London School of Economics & Political Science (LSE) - Department of Geography and Environment

Gilles Cols

World Bank

Date Written: August 2017

Abstract

For the past quarter of a century, foreign direct investment (FDI) flows have grown exponentially across the world. Sub-Saharan Africa has, however, lagged behind and only lured on average a mere 2% of global FDI. The investment that the region attracts tends, moreover, to be concentrated in a number of commodity-rich countries. Natural resources and the size of national markets have generally been considered as the main drivers of FDI. The quality of local institutions has, by contrast, attracted less attention. This paper uses institutional data for 22 countries in order to demonstrate that the quality of governance plays a far from negligible and enduring role in the distribution of FDI in sub-Saharan Africa. It is shown that factors such as political stability, government effectiveness, lower corruption, voice and accountability, and the rule of law not only are more important determinants of FDI than the size of local markets, but also that their influence on the capacity of African countries to attract FDI is long-lasting.

Keywords: foreign direct investment (FDI), good governance, institutions, markets, Natural resources, Sub-Saharan Africa

JEL Classification: F21, N57, O43

Suggested Citation

Rodríguez-Pose, Andrés and Cols, Gilles, The Determinants of Foreign Direct Investment in Sub-Saharan Africa: What Role for Governance? (August 2017). CEPR Discussion Paper No. DP12223, Available at SSRN: https://ssrn.com/abstract=3023207

Andrés Rodríguez-Pose

London School of Economics & Political Science (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Gilles Cols (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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