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Determinants of Economic Growth in Africa pp 55–93Cite as

Palgrave Macmillan

Determinants of Foreign Direct Investment Inflows to Africa

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Abstract

Based on a new analytical country classification of African economies as fragile, factor and investment driven economies, we identify the main determinants of FDI inflows to Africa. Using a panel co-integration approach for the period 1996–2012 we find market size, availability of natural resources, openness to international trade, a stable macroeconomic environment, better infrastructure and an effective bureaucracy to have a strong positive impact in attracting FDI to Africa. On the other hand, political and macroeconomic instability and high financial and transfer risks have a negative effect in attracting FDI to the continent. However, the effect of these factors varies significantly across the analytical country classification that we have developed. Among all FDI determinants only government effectiveness and natural resource abundance are important across all countries. This suggests the importance of emphasizing different policies in different countries or country groups. Moreover, our analysis also suggests that the new analytical classification developed in this study can be an important guide for operational and analytical works of continental organizations such as the African Development Bank, the Economic Commission for Africa and the African Union.

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Notes

  1. 1.

    The empirical discussion presented here does not discuss the findings from country case studies in Africa. However, country case studies in Africa reported a similar result to the cross-sectional studies in Africa (see Geda and Yimer 2015).

  2. 2.

    This section does not pretend to be exhaustive on stage theory.

  3. 3.

    The notion of hard infrastructure refers to the prevailing state of rationality, science, technology, the mode of organization and the degree of human development (human capital formation). Soft infrastructure refers to the corresponding distribution of income and levels of poverty, the social conditions under which production takes place, the mode of thought, ideology, culture and global perspective of citizens (see Geda 2002 and Lin 2011, among others).

  4. 4.

    Subtracting Yt−1 from either side of Eq. (3) and adding and subtracting X t−1 in the right hand side of the resulting equation gives Eq. (4).

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Author information

Authors and Affiliations

  1. Department of Economics, College of Business and Economics, Addis Ababa University, Addis Ababa, Ethiopia

    Alemayehu Geda & Addis Yimer

Authors
  1. Alemayehu Geda
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  2. Addis Yimer
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Editor information

Editors and Affiliations

  1. Department of Economics, Sogang University, Seoul, Korea (Republic of)

    Almas Heshmati

Appendix

Appendix

Suggested Proxies for Empirical Application of the Country Classification:

Table 4 An alternative proposed country classification of African Economies

Country’s stage of development

Suggested proxies for measuring the stage

(a) Innovation-Driven African Economies

(Advanced [frontier] African Economies)

R&D spending as percent of total government spending and also as percent of GDP

Number of patent applications (as proxy for innovation)

Number of leading global companies

Tertiary education enrolment share, gross secondary education enrolment share, gross internet users per 100; mobile users (per 100)

Private sector development (entrepreneurship: stock market value)

Competitive democracy (governance indicator)

GDP per capita (in US$)

(All proxy indicators above should be benchmarked/comparable to the level attained by East Asian countries or a sample of them such as China, India and Taiwan)

(b) Investment-Driven African Economies

(Emerging African Economies)

Investment (GCF) as share of GDP

Gross domestic saving (share of GDP)

FDI as share of GDP

Manufacturing sector as the share of GDP

Manufacturing export as the share of total exports

Existence of stock market and listed companies

Stable macroeconomic regime (inflation, CAD and Fiscal deficit percent GDP)

Private sector development (entrepreneurship: stock market value)

Competitive democracy (governance indicator)

Road, km; rail and mobiles per 100 people

(All proxy indicator above should be at least half the level attained by East Asian countries or a sample of them such as China, India and Taiwan)

(c) Factor-Driven African Economies

(Aspiring African Economies)

(C1) Agricultural Commodity Driven Economies (Class A)

(C2) Non-Agricultural Commodity Driven Economies (Class B)

Share of primary commodities in total exports >75 percent

Share of manufactured exports in total exports <25 percent

Road, rail and mobile per capita (< half of East Asia)

Agricultural commodity exports >75 percent of exports

Agriculture in GDP (above 40 percent)

(Non-agricultural commodity exports >75 percent of exports)

Agriculture in GDP (below 40 percent)

(d) Post-Conflict and Fragile African Economies

lowest (<3) country policies and institutional performance assessment (CPIA) index value

Uncompetitive democracy

Emerged from conflict (less than 10 years)

Existence of active rebellion

Table 5 Final analytical country classification for the model

Fragile State African Economies

(AfDB CPIA <3)

Investment-Driven African Economies (Emerging or Frontier African Economies)

Factor-Driven African Economies (Aspiring African Economies)

Comment

Burundi

North Africa

(Rest of Africa)

•No African economy has reached the innovation driven stage (advanced African), yet (except to some degree South Africa followed by Egypt and Algeria)

•(Libya, Madagascar and Mozambique on the border line scoring 40 percent while the passing level for the scale of 10 indicators is 50 percent)

Central African Republic

Algeria

Angola

Chad

Egypt

Benin

Comoros

Tunisia

Burkina Faso

Congo, Dem Rep

Morocco

Cameroon

Congo, Rep

Other Africa

Equatorial Guinea

Cote d’Ivoire,

Botswana

Ethiopia,

Central African Republic

Kenya,

Gabon

Djibouti

Mauritius,

Gambia, Ghana

Eritrea

Malawi

Lesotho, Libya

Guinea

Namibia,

Madagascar, Mali

Guinea-Bissau

South Africa

Mauritania

Liberia

Cape Verde

Mozambique

Sao Tome and Principe

 

Niger Nigeria

Sierra Leone

 

Rwanda, Senegal

Somalia

 

Seychelles, Swaziland

Sudan

 

Tanzania,

Togo

 

Uganda,

Zimbabwe

 

Zambia

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Geda, A., Yimer, A. (2018). Determinants of Foreign Direct Investment Inflows to Africa. In: Heshmati, A. (eds) Determinants of Economic Growth in Africa. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-76493-1_3

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