DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN SELECTED SOUTHERN AFRICAN DEVELOPMENT COMMUNITY (SADC) FOR THE PERIOD 2001 to 2010

Happy Mutungwazi

Working Papers from African Economic Research Consortium

Abstract: The Southern African Development Community (SADC) regional bloc has been undertaking investment reforms with a view of creating an enabling and conducive environment for all their member states to increase Foreign Direct Investment (FDI) inflows. FDI is preferred to because of its arguable economic benefits among them that it closes domestic resource gaps. Furthermore, FDI can reduce unemployment levels common in several SADC nations. FDI introduces managerial skills through technological transfers, as well as producing export enhanced economic developments. In view of the foregoing, many SADC countries have promulgated various policies that can incentivise foreigners to pour FDI inwards. Despite these efforts, studies have shown that FDI levels are dismally low as compared to the rest of Africa. Efforts to establish the reason for such poor FDI inflows have been extensively carried out in many studies. However, these studies omit some recent key noneconomic determinants that affect FDI inflow to the SADC bloc. This study analyses the determinants of FDI inflow to the SADC bloc for the recent decade of 2001 to 2010 using the panel data methodology. Our study estimated macroeconomic determinants of FDI in the SADC region namely: rates of interests, current account balances, gross domestic product, national external debt, and exchange rates as well as institutional determinants of FDI namely: political stability, control of corruption and voice and accountability issues. Interest rates, exchange rates, and gross domestic product variables were all found to be important determinants of FDI in the region. All institutional variables were proved to be essential determinants of FDI in the SADC bloc. The study concluded that SADC FDI inflows are positively influenced by a growing demand in terms of an expanding SADC bloc coupled with a stable single currency exchange rate. Policies that advocate for a bigger integrated common economy and the adoption of single currency are the best way in attracting large FDI inflows to SADC. SADC states should, in addition pursue policies that take into considerations the effective uphold of political stability and absence of violence, measures to nip out corruption and a tolerant governance structure. The unstable macroeconomic environment obtaining in many SADC states such as high interest rates are negatively affecting FDI inflows to the region.

Date: 2014-05-06
Note: African Economic Research Consortium
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