The Effect Of Foreign Direct Investments On Economic Growth In Sub-Saharan Africa: Does Governance Act As A Mediator?

Author

TINARWO MISHAEL

Title

The Effect Of Foreign Direct Investments On Economic Growth In Sub-Saharan Africa: Does Governance Act As A Mediator?

Abstract

This study looks at the impact of foreign direct investment FDI on economic growth in Sub-Saharan Africa (SSA) and the influence of governance. The paper employs panel data analysis for 16 SSA nations from 2004 to 2022, as well as fixed and random effects models, to evaluate the impact of FDI and other factors on GDP. The findings indicate that FDI has a positive and substantial influence on GDP in SSA, but this effect is reduced by governance, as evaluated by the corruption perception index CPI. Corruption has a major influence on GDP, as evidenced by the large and negative interaction term between FDI and corruption, demonstrating that corruption diminishes the advantages of FDI for economic growth by raising transaction costs, uncertainty, and rent-seeking behaviour for foreign investors. The study reveals that FDI has a positive and significant effect on GDP, with a coefficient of 0.2687, implying that a 1% increase in FDI inflows leads to 0.2687% increase in GDP. However, the study also finds that governance, as measured by the corruption perception index (CPI), has a negative and substantial influence on the link between FDI and GDP, with an interaction value of -0.0041. According to the study, greater levels of corruption decrease the beneficial effect of FDI on GDP, emphasizing the significance of strong anti-corruption measures and improved governance practices to maximize the advantages of FDI in SSA. Based on these findings, the report proposes that governments should strengthen governance and anti-corruption measures, promote investment-friendly policies, improve institutional quality, support domestic Firms and invest in human capital development.

Date

JUNE 2024

Publisher

BUSE

Keywords

Foreign Direct Investment

Economic Growth

Corruption

Sub-Saharan Africa

Governance

Supervisor

Dr T. Kairiza.