Factors influencing the attraction of foreign direct investment and foreign portfolio investment into African economies

Abstract

The purpose of this study was to identify and examine the key factors which determine whether African economies are attractive enough to harness international capital inflows from foreign investors. The evidence gathered shows that financial market development, institutional quality, natural resource deposits, cheap unskilled labour, as well as previous experience with international trade of goods and services, improve the likelihood of African economies receiving FDI inflows. In order to attract FPI inflows, African economies need to liberalise their capital accounts. Doing so requires strong regulation of financial markets, and instruments traded thereof. As FPI inflows increase, domestic financial markets become deeper and broader, thereby opening up alternative sources of capital (equity and bonds) for local firms. It is therefore recommended that African Governments strengthen not only their competitiveness in the import and export market, but also their foreign policies to complement domestic policies of further investment which results in economic growth and employment creation.