Impact of FDI on environmental performance in Africa: the role of institutional quality

Ilemobola Solomon Oyefabi, W.N.W. Azman-Saini and Mohamad Khair Afham Muhamad Senan

African Journal of Economic and Sustainable Development, 2026, vol. 11, issue 1, 58-79

Abstract: The study examines how institutional quality complements foreign direct investment to enhance environmental performance in the top ten FDI host African countries for the period 1996 to 2022. Based on the DCCE estimation techniques, we established the following result; first, from the non-interactive session, we confirmed the pollution haven hypothesis and the N-shaped relationship between FDI and environmental performance. However, the result invalidates the inverted U-shaped relationship. Secondly, our interactive analysis reveals that the interaction between FDI and institutional quality plays a crucial role in enhancing environmental performance. This positive relationship holds in both the short run and long run, emphasising the importance of strong institutions in mitigating the negative effect of FDI on environmental performance. It is therefore recommended that to mitigate the negative effects of FDI on environmental performance and achieve long-term environmental sustainability, the government and relevant international agencies need to prioritise efforts in improving institutional quality.

Keywords: institutional quality; foreign direct investment; FDI; environmental performance; EKC hypothesis; dynamic common correlated effect; DCCE. (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ajesde:v:11:y:2026:i:1:p:58-79

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