Impacts of governance on investment climate in Sub-Sahara Africa

Abstract

The multi-dimensional impacts of the investment climate in an economy make extensive research on how investment climate can be enhanced imperative. However, the extant literature on the role of governance on investment climate remains very shallow. This study, therefore, examines the impacts of governance on investment climate using a panel data set of 39 Sub-Saharan African (SSA) countries between 2015 and 2019. The study proxied investment climate with ease of doing business scores obtained using Distance to Frontier (DTF) methodology, while governance institutions were measured by the six clusters of governance produced by the World Bank. The six clusters of governance include government effectiveness, regulatory quality, control of corruption, rule of law, political stability and absence of violence, and voice and accountability. The results of the diagnostic tests indicate that the data violated the classical linear regression assumptions of homoscedasticity, exogeneity, no serial correlation, and normal distribution. As a result, the data were analyzed using panel feasible generalized least squares (FGLS) regression, which allows estimation of a panel regression in the presence of first-order serial correlation within panels, heteroscedasticity, and cross-sectional correlation across panels. Our panel FGLS results revealed a positive and significant impact of all the six clusters of governance on investment climate represented by the ease of doing business score in SSA. Government capacity (represented by government effectiveness and regulatory quality) was found to exert the greatest impact, followed by the respect of citizens and the state for the institutions (represented by control of corruption and the rule of law) and how the government is selected and replaced (represented by political stability and absence of violence, and voice and accountability). Therefore, the study recommends that SSA countries should endeavour to improve their governance in all its dimensions to improve their ranking in the ease of doing business and promote a better investment climate.