Risk and Private Investment: Africa Compared with Other Developing Areas

Abstract

This chapter analyses the determinants of private investment in developing countries. The starting point is a description of recent trends in domestic private investment and foreign direct investment (FDI) in these countries with special focus on Sub-Saharan Africa. The next step is a brief review of recent developments in the theory of investment under uncertainty. We focus on country risk, a particular form of uncertainty. The paper discusses the relationship between private investment and measures of country risk, taking into account the country’s existing economic and financial policies, whether the institutional structure is supportive of private sector development, and the willingness and ability of the state to honour its commitments to the private sector, both domestic and foreign. We next present the results of empirical work on the determinants of investment performance — both domestic and foreign — including political and economic risk, macroeconomic balance, growth of productivity, the vulnerability of the economy to external shocks and the level of human capital. The paper concludes with a summary of the results of the empirical analysis as it relates to the countries of Sub-Saharan Africa.