The determinants of foreign direct investment to Africa : a regional perspective

Moodley, Pathmabathi (Stellenbosch : Stellenbosch University, 2006-12)

Thesis

ENGLISH ABSTRACT: "Private intemational capital flows, particularly foreign direct investment, are vital complements to national and intemational development efforts. Foreign direct investment contributes toward financing sustained economic growth over the long term. It is especially important for its potential to transfer knowledge and technology, create jobs, boost overall productivity, enhance competitiveness and entrepreneurship, and ultimately eradicate poverty through economic growth and development (Nunnenkamp, 2002). As a result of these associated benefits, strategies for the attraction of FDI have become an increasingly important item on a country's economic agenda. However, prior to these strategies being developed and as a result of the concentration of high FDI flows to a limited number of countries, it is important to establish those salient factors that drive FDI flows. Africa has failed to hamess onto the FDI phenomenon and as a continent attracts very little FDI inflows. To date, only a limited number of empirical studies have been done on FDI flows to Africa. The objective of this study is to establish the macroeconomic and political factors that will stimulate and increase the flows of FDI to Africa. Pooled econometrical analysis, using the Random and Fixed Effects method is used in the empirical estimation. The findings differ according to the type of model used, however, the results in general, reveal that the level of industrialisation in a country, the state of its infrastructure, the country's economic growth rate and productivity levels are important determinants of the flows of FDI to Africa. The surprising result is that political stability and the level of openness in Africa are insignificant determinants of the flows of FDI to Africa. Very few studies take into account that Africa can be classified into various regional groupings viz; North, East, West, Central and Southem Africa, with previous studies focusing mainly on North Africa and Sub Saharan Africa. An additional objective of the study was to determine the regional specific determinants that drive FDI. The findings reveal that openness is important in North Africa and Central Africa whilst the level of industrialisation significant in a North African and West African context. The state of the infrastructure network is central to FDI flows in West and Central Africa whereas political stability is the key to promoting FDI flows to East Africa. A surprising finding is that none of the tested determinants were significant in a Southern African context. The above-mentioned findings demonstrate the need for further research in terms of the country specific determinants of FDI. This will serve to advise governments in the drafting of a country's national policy agenda and selection of FDI attraction strategy, so that the benefits thereof are maximised and costs thereto minimised.

AFRIKAANSE OPSOMMING: "Private internasionale kapitaalvloei, veral direkte belegging in die buiteland, is aanvullings wat van die allergrootste belang is vir nasionale en internasionale pogings wat met ontwikkeling verband hou. Buitelandse direkte belegging (BDB) dra by tot die finansiering van volgehoue ekonomiese groei op die lang termyn. Dit is veral belangrik vir die potensiaal daarvan om kennis en tegnologie oor te dra, werksgeleenthede te skep, algehele produktiwiteit te verstewig, mededingendheid en entrepreneurskap te verbeter, en om armoede uiteindelik deur ekonomiese groei en ontwikkeling uit te skakel" (Nunnenkamp, 2002). In die lig van hierdie gepaardgaande voordele, het strategieë vir die aantrekking van BDB 'n toenemend belangrike item op 'n land se ekonomiese agenda geword. Voordat hierdie strategieë egter ontwikkel word, en as gevolg van die konsentrasie van hoë BDB-vloei na 'n beperkte aantal lande, is dit belangrik om daardie vernaamste faktore wat BDB-vloei aandryf, te vestig. Afrika het versuim om die BDB-verskynsel in te span, en as 'n vasteland lok dit baie min BDB-invloei. Tot op datum is slegs 'n beperkte aantal empiriese studies oor BDB-vloei na Afrika gedoen. Die doelwit van hierdie studie is om die makroekonomiese en politiese faktore vas te stel wat die vloei van BDB na Afrika sal stimuleer en verhoog. 'n Poel van ekonometriese ontledings deur die metode van Stogastiese en Vaste Effekte word in die empiriese skattings gebruik. Die bevindings verskil volgens die tipe model wat gebruik word, maar die resultate oor die algemeen toon dat die vlak van industrialisasie in 'n land, die toestand van 'n land se infrastruktuur, die land se ekonomiese groeitempo en produktiwiteitsvlakke belangrike bepalers is van die vloei van BDB na Afrika. Die verbasende resultaat is dat politiese stabiliteit en die vlak van die oopheid van ekonomieë in Afrika onbelangrike bepalers van die vloei van BDB na Afrika is. 'n Geringe aantal studies neem in aanmerking dat Afrika in verskillende streeksgroeperings, nl Noord-, Oos-, Wes-, Midde-, en Suider-Afrika ingedeel kan word, met vorige studies wat hoofsaaklik op Noord-Afrika en sub-Sahara-Afrika fokus. 'n Bykomende doelwit van die studie was om die streek spesifieke bepalers wat BDB aandryf, vas te stel. Die bevindings dui daarop dat oopheid van ekonomieë in Noord-Afrika en Midde-Afrika belangrik is, terwyl die vlak van industrialisasie in die konteks van Noord-Afrika en Wes-Afrika betekenisvol is. Die toestand van die infrastruktuurnetwerk is sentraal tot BOB-vloei in Wes- en Midde-Afrika terwyl politiese slabiliteit die sleutel is tot die bevordering van BOB-vloei na Oos-Afrika. 'n Verbasende bevinding is dat geen van die getoetste bepalers in die konteks van Suider-Afrika betekenisvol was nie. Bogenoemde bevindings toon die behoefte aan verdere navorsing in terme van die spesifieke bepalers van BOB van 'n land. Dit sal dien om inligling te verstrek oor 'n land se nasionale beleidsagenda en 'n seleksie van strategie om BOB te lok, sodat die voordele gemaksimeer en die koste daarvan geminimiseer kan word.

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