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Does foreign direct investment promote institutional development in Africa?

Roger Fon, Fragkiskos Filippaios (), Carmen Stoian and Soo-Hee Lee

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Foreign direct investment (FDI) inflows into Africa have increased since the turn of the millennium, mainly due to FDI growth into African countries by multinational enterprises (MNEs) from developing economies. 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 developing economies. This paper examines the impact of FDI flows on institutional quality in African countries by distinguishing investments from developed versus developing economies. Previous empirical studies have found a significant relationship between FDI flows and institutional quality in African countries but regard the relationship as MNEs rewarding African countries for adopting institutional reforms. However, little attention has been paid to the reverse causality, i.e. that FDI can cause an institutional change in African countries. Using bilateral greenfield FDI flows between 56 countries during 2003-2015, we find no significant FDI effect from developed and developing economies on institutional quality in host countries. However, aggregate FDI flows from developed and developing economies have a significant positive effect on host country institutional quality but differ concerning the impact's timing. In contrast, we find no significant effect of FDI flows from China on host country institutional quality. Our results are robust to alternative measures of institutional quality.

Keywords: foreign direct investment; co-evolution; institutions; multinational enterprises; Internal OA fund (search for similar items in EconPapers)
JEL-codes: F3 G3 J01 R14 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2021-08-01
New Economics Papers: this item is included in nep-cwa, nep-fdg and nep-int
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Published in International Business Review, 1, August, 2021, 30(4). ISSN: 0969-5931

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