ECONOMIC FREEDOM, FINANCIAL DEVELOPMENT AND FOREIGN DIRECT INVESTMENT INFLOWS IN AFRICAN COUNTRIES, 2007-2018

Zewdie Habte Shikur

Applied Econometrics and International Development, 2024, vol. 24, issue 1, 81-96

Abstract: Efficient institution of economic freedom and financial development increases foreign direct investment inflows. Institutions that accelerate economic freedom significantly increase the higher level of foreign and local investments and encourage economic growth. Therefore, the study particularly investigates economic freedom and financial development that are instrumental in attracting foreign capital inflows using a Generalized Method of Moments (GMM). Also, the determinants of FDI inflows are examined in this study. The model results indicated that the estimated coefficients for trade openness and economic freedom, institutional quality, market size, financial development, and infrastructure are positive; thereby particularly confirming that efforts to strengthen policy focus on trade openness, institutional quality, financial development and economic freedom would significantly attract FDI. Economic freedom and institutional quality facilitate the efficient exercise of private property rights which are significantly crucial deriving forces in attracting many FDI in Africa. The overall performance of logistics, tax rate, and wage reduce FDI inflows. The changes in trade openness, infrastructure, market size, and financial development significantly increase the number of FDI inflows, which create additional job opportunities. To enhance the attractiveness of African countries, they should start large initiative projects in all areas to improve the investment environment. Governments in Africa should focus on FDI inflow policies that could improve trade openness, economic freedom, institutional quality, financial development, and infrastructure development to increase the hosting country ability to attract FDI, thereby achieving rapid economic growth.

Keywords: financial development; economic freedom; institutional quality; economic openness; logistics performance; FDI inflows. (search for similar items in EconPapers)
Date: 2024
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