The Nexus between Institutional Quality & Foreign Direct Investment (FDI) in Sub-Saharan Africa

Abstract

This study analyzes the nexus between foreign direct investment and institutional quality including political stability, rules of law, government effectiveness, voice & accountability, and regulatory quality. The major aim of this study is to examine the relationship between institutional quality and foreign direct investment. This study consists of a sample of Sub-Saharan African countries. Our study employed two-panel data techniques including Random Effect Model (REM) and Vector Autoregressive Model (VAR). The study period covers from 2015 to 2019. Empirical findings of REM indicated that both rules of law and government effectiveness have positive and statistically significant influences on foreign direct investment inflow in the SSA region. Similarly, the study utilized other explanatory variables such as the trade and labor force. The result of VAR highlighted the positive and statistically significant influence of labor force and trade on foreign direct investment inflow, therefore, the effectiveness & efficiency of region institutional quality are usually dependent on the robustness of those variables. Thus, the study recommends having higher foreign direct investment inflow in the region is necessary to make policy reforms that strengthen the quality and efficiency of governance.