Institutional Quality and Foreign Direct Investment: Evidence from the Selected Sub-Saharan African Countries

Abstract

Abstract: Orientation: Foreign direct investment (FDI) is vital for economic growth and development in sub-Saharan African (SSA) countries. Research purpose: This study investigates the relationship between institutional quality and FDI in 40 SSA countries from 2000 to 2021. Motivation for the study: Despite FDI’s importance, SSA countries face institutional challenges that may deter investment. Understanding how institutional factors affect FDI is crucial for effective policy formulation. Research design, approach and method: Using a quantitative approach, the study employs yearly panel data and the system generalised method of moments to control for endogeneity, autocorrelation and unobserved heterogeneity. Variance inflation factor checks for multicollinearity, while CD Pesaran and Friedman tests assess cross-sectional dependence. Main findings: Institutional quality positively and significantly impacts FDI in SSA countries. Measures including rule of law, government effectiveness, control of corruption, regulatory quality, voice and accountability, political stability and corruption perceptions increase FDI, while the political rights index negatively affects it. Practical/managerial implications: Sub-Saharan African governments should continuously reform institutional frameworks, benchmarking successful countries to remain competitive in attracting FDI. Contribution/value-add: The study offers empirical evidence on the critical role of institutional quality in driving FDI inflows, providing nuanced insights for policymakers.