The impact of the investment climate on foreign direct investment in Africa

Abstract

This paper investigates the impact of investment climate on FDI in Africa using a dataset that spans 2000 to 2018. It also hypothesised that the relationship between investment climate and FDI could vary by country classification as a landlocked, least developed (LDC), natural resource-abundant or has a developed financial market system (DFM). The system’s GMM and the fixed-effect model with Driscoll-Kraay standard errors results show that investment climate is critical for FDI in Africa, resource-rich countries and those with DFM. Conversely, the role of the investment climate is less significant in landlocked countries, which underscores the need to consider the possibility of heterogeneity to avoid false-positive conclusions. We also find that the moderating role of the investment climate and GDP is nontrivial in the relationship. These results suggest that the LDCs and landlocked countries need to strengthen their investment climates by adopting policies that enhance the rule of law, fight corruption and build robust institutions to attract FDI. It also shows how researchers can navigate the considerable encumbrance of dealing with several constructs of the investment climate by employing principal components analysis, which gives the optimal granularity required for further investigation. This more specific definition is critical when the intent is to make generalities about the role of the investment climate.