Investment Climate and Foreign Direct Investment in Africa

Emmanuel Nnadozie, United Nations Economic Commission for Africa and Angelica E.Njuguna, Economic consultant based in Ethiopia

This paper investigates the relationship between the investment climate, in particular the prevailing business regulations, and foreign direct investment (FDI) in Africa. As most FDI in Africa goes to the resource seeking investments and benefits only a handful of countries, in particular the oil-producing countries, the study shows that the small, non-resource country in Africa can increase their chance of attracting the much needed FDI to support development, if they instituted reforms to improve the investment climate in their country through better business regulations that promote a friendly business environment. An empirical model was estimated using business regulations variable as one of the regressors among the other controlled variables. Indeed, the study found evidence that business rules and regulations are important in attracting FDI in Africa. This result counters the common perception that FDI in Africa is solely determined by the natural resource endowment. This has important policy implications given the importance of FDI for growth and employment and the fact that many African countries are embarking on costly regulatory and bureaucratic reforms to improve the investment climate without any guarantees of increased FDI inflows.