Institutions as a determinant of foreign direct investment inflows into the Southern African Development Community

Abstract

Foreign Direct Investment (FDI) in Southern Africa has been one of the drivers of infrastructure development and economic growth, especially in mining, agriculture, energy, information, and communications technology (ICT). Some of the SADC countries have undertaken serious economic and institutional reforms to encourage the inflow of FDI, particularly to low-income countries of the region, but these efforts have not so far led to the expected increases in investment: the overall amount of FDI remains low, it is concentrated in very few countries and mostly goes to the extraction of natural resources. Institutions and infrastructure development typically have a positive effect on FDI inflows as they improve investment climate. To examine their role in boosting the FDI flows to the SADC countries, the paper uses panel data econometric analysis with OLS and PCSE. Its results show that the quality of governance, together with the level of economic development, market size, and openness to international trade are the main factors that determine the amounts of FDI flowing into the SADC countries. For some areas, however, the primary need is to combat the rampant corruption and reduce political instability.