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Revisiting the Determinants of Foreign Direct Investment in Africa: The Role of Institutions and Policy Reforms

Gamal Ibrahim, Adam Elhiraika, and Abdalla Hamdok, UNECA, and Abbi Kedir, University of Leicester, UK

This paper investigates the key determinants of net FDI inflows in Africa using a recent panel data of 31 countries for 26 years (1984-2009). By adopting both baseline static and dynamic panel data models, we provide evidence that market size, past levels of inward FDI, corruption, domestic credit, share of oil in exports and religious tension risk are significant drivers of inward FDI in Africa. Our work reveals that FDI to Africa is market-seeking and follows oil economies. The significance of the lagged dependent variable is an evidence of another concentration pattern (i.e. agglomeration effects). FDI to the continent seems to be concentrated in places where there is already prior inward FDI. Most of the political and institutional risk indicators are found to be insignificant. Domestic bank credit is instrumental to FDI inflows, but only in the presence of quality bureaucracy. To attract FDI into the continent, besides policies to expand markets, credible institutional policy reforms are urgently needed to improve economic governance and political stability, particularly by enhancing the quality of civil services, and combating corruption and religious tensions.