Does foreign direct investment promote institutional development in Africa?

Roger Mongong Fon, Fragkiskos Filippaios, Carmen Stoian, Soo Hee Lee

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

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.

Original languageEnglish
Article number101835
JournalInternational Business Review
Volume30
Issue number4
Early online date16 Mar 2021
DOIs
Publication statusPublished - Aug 2021

Keywords

  • Co-evolution
  • Foreign direct investment
  • Institutions
  • Multinational enterprises

Cite this