Institutional Quality and Inward Foreign Direct Investment in Africa: The Moderation Effects of Ease of Doing Business

Abstract

This article examines the linkage between institutional quality (IQ) performance and foreign direct investment (FDI) inflows in 45 African countries from 2010 to 2019. The study moderates this relationship by ease of doing business (EDB) which reflects friendliness of the country’s business environment. In addition, disparities in terms of IQ, EDB and FDI between African countries in different geographical regions and economic development groups are examined. ANOVA and Post-hoc ANOVA results firstly reveal significant variations in between African countries in terms of IQ, EDB and FDI inflows with the Southern and Northern African regions appearing to perform better. The fixed effects regression estimation results show significant disparities in inward FDI, IQ and EDB between different African regions and countries at different levels of economic development. The results secondly depict unidirectional predictive power of IQ indicators and EDB on FDI inflows. In addition, the study finds insignificant linear relationship between IQ indicators and FDI inflows except for rule of law and control of corruption. Moreover, the findings reveal that the impact of these two (2) indicators on FDI inflows is strengthened by EDB. This study adds to existing knowledge since extant literature on the linkage between IQ and FDI inflows has generated mixed findings. Moreover, the role of EDB on the linkage between IQ and FDI inflows has seldom been studied. The findings emphasize the need for policy makers in African countries to work towards combating corruption and improving rule of law while creating conducive business climate for foreign investors.