Interest rates and FDI in some selected African countries: The mediating roles of exchange rate and unemployment

Abstract

Capital chases higher returns, and African countries continuously strive to implement effective policies to attract more Foreign Direct Investments (FDI). Against this backdrop, we explore the relationship between interest rates and FDI inflows in Africa and how exchange rates and unemployment distinctively affect that relationship. We employ panel data on six major FDI-hub economies in Africa for the period 1990-2017. The results of the study suggest that interest rates have a statistically significant positive impact on FDI inflows. Also, the results indicate that when exchange rates interact with interest rates the effect of the latter on FDI is less positive especially in economies where exchange rates are high. On the other hand, when unemployment interacts with interest rates the impact of the latter on FDI is more positive. We conclude that policies that
stabilize exchange rate and increase labor development should be fortified if an African economy wants to achieve and sustain long term inflows of FDI.