Does Foreign Direct Investment promote Institutional Development in Africa?

Roger Fon, Fragkiskos Filippaios, Carmen Stoian

Research output: Contribution to conferencePaperpeer-review

Abstract

FDI inflows into Africa have increased sharply since the turn of the millennium mainly due to the growth in OFDI from emerging economies. However, while African governments view this growth as a positive development for the continent, many governments in the West have raised concerns regarding the institutional impact of investments from emerging economies. This paper explores the impact of FDI inflows on institutional development in African countries and whether such effects are similar for investments from developed versus developing economies. Previous empirical analyses have found a significant relationship between FDI and institutional reform in African countries, but regard the relationship as MNEs rewarding African countries with institutional reform decisions. Very little attention has been paid to the fact that FDI can act a cause of institutional change in African countries. To address endogeneity problems, we use the real effective exchange rate movement as an instrument in an instrumental variable two-stage procedure. We find a positive effect of FDI on institutional quality through a cross- sectional analysis of greenfield FDI projects in 37 African countries for the period 2003-2015. However, we find that FDI from developing economies and China, in particular, have a negative effect on institutional quality and is robust to alternative measures of institutional quality.
Original languageEnglish
Pages1-26
Number of pages26
Publication statusAccepted/In press - 1 Sept 2018

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