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International Journal of Business, Economics and Management

February 2019, Volume 6, 2, pp 111-129

Foreign Direct Investment - Growth Linkage in Sub-Saharan Africa: Is Governance a Mediating Factor?

Fisayo Fagbemi

,

Kehinde Mary Bello

Fisayo Fagbemi 1 ,

Kehinde Mary Bello 1 
  1. Graduate Student of the Department of Economics, Obafemi Awolowo University, Ile – Ife, Nigeria 1

Pages: 111-129

DOI: 10.18488/journal.62.2019.62.111.129

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Article History:

Received: 23 November, 2018
Revised: 02 January, 2019
Accepted: 13 February, 2019
Published: 09 April, 2019


Abstract:

In sub – Saharan Africa, weak institutions and the rising concern for improved business environment offer considerable leverage for enhancing the effectiveness of institutional framework, capital inflows, and public investment efficiency. These have put SSA in the global spotlight in recent times. Hence, the study examines the mediating effect of governance on FDI – growth nexus in 35 SSA countries between 2002 and 2017 using panel data techniques (Pooled OLS, Fixed Effects, and Panel-Corrected Standard Error’ (PCSE) estimation) and the Dynamic One – Step Difference and System GMM. Results indicate that control of corruption, political stability and regulatory quality, including governance composite index, have a positive and significant effect on economic growth, suggesting that institutions have a salutary impact on SSA economies. The findings further show that FDI inflows adversely influence growth owing to insufficient absorptive capacity that could enhance FDI effectiveness in the region. More importantly, the pervasiveness of poor governance in SSA is identified as a critical case that undermines the development of the nexus between FDI and economic growth. Thus, the study suggests that FDI – growth linkage would be enhanced by promoting a strong institutional environment that offers a good mechanism for attaining the actual FDI spillover potential through a policy framework that points the path towards cost-effective measures in SSA. Also, there should be core investment policies across African countries that would induce the private sector in consolidating government efforts and resources aimed at improving international competitiveness by diversifying the region’s economies away from a protracted commodity – based.
Contribution/ Originality
The study offers a sufficient basis of analysis that amplifies and consolidates FDI-governance-growth literature. It also addresses unresolved mixed conclusions arising from puzzling methodological issues through the use of efficient and robust estimation techniques. The paper provides a better understanding of the role of governance in FDI-growth nexus regarding Africa.

Keywords:

Foreign direct investment, Governance, Capital inflows, Panel analysis, Economic growth, Sub – Saharan Africa.

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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

Both authors contributed equally to the conception and design of the study.

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