Institutional quality, foreign direct investment, and economic development in sub-Saharan Africa

Abstract

Foreign direct investment (FDI) is regarded as a critical determinant in the concept of development for Africa. However, institutional quality in the recipient countries is considered an essential factor that can be used to drive FDI flows inward. The study aims to establish the effect of institutions’ challenges on the FDI inflow and how it impacts on economic development for host selected countries in sub-Saharan Africa (SSA). The study employed pooled data for 30 SSA countries for the period within the years 2000 and 2018. The analysis method used was the fixed and random effect regression model utilized to estimate the effect of foreign capital on economic development with considerations for the quality of institutions for developing SSA sub-region of Africa. This study reveals that foreign capital inflow is crucial for economic development in the SSA sub-region of Africa. Quality of institutions as determining factors also affected the level of inflow of FDI to the host SSA sub-region, which resulted in the underutilization of domestic resources and hence abnormal development of domestic sector investment. The study recommends that the government of host SSA sub-region needs to consider the degree of institutional quality to encourage further FDI inflows. To afford the maximal benefit of FDI in the development of the host domestic sector and to guard the industry that foreign investment flows into carefully. It is expedient, thereby, that the domestic investment is enhanced to ensure that dependence on foreign capital inflow continues to decline as income increases. Until domestic investments are sufficient to generate advancement in technology and desired economic development for the selected countries, in the SSA sub-region.