Does Eurobond issuance influence FDI location? Evidence from sub-Saharan Africa

Abstract

PurposeDoes the issuance of Eurobonds carry enough information about favourable domestic conditions to warrant more FDI inflows? In this study, the authors investigate how FDI is responding to the rising levels of Eurobonds in sub-Saharan African (SSA).Design/methodology/approachThe study uses the system GMM model to set up a panel with all 17 SSA countries with Eurobonds. The dataset was transformed into time series, and the VAR model and Granger causality were used to diffuse the doubt of a possible bi-causal relationship between Eurobonds and FDI. Additionally, the authors use the impulse response function to test the behaviour of FDI to a one-time shock to Eurobonds.FindingsThe study reports that Eurobond levels matter in explaining FDI receipts. Specifically, the authors report that the issuance of Eurobonds leads to a favourable increase in FDI inflows. The authors transform our data into time series and use the VAR model and Granger causality test to diffuse the doubt of a possible bi-causal relationship between Eurobonds and FDI. The authors’ findings from this exercise suggest that two lag levels of Eurobond are a good predictor of future FDI flows. More also, the authors use the impulse response function to test the behaviour of FDI to a one-time shock to Eurobonds and report that a one-unit standard deviation shock to Eurobonds will cause FDI to swell up over at least 8 years.Research limitations/implicationsThe study is limited in scope due to data availability. Future studies may consider using countries across the globe that have issued Eurobond to retest the current research objectives.Practical implicationsThe study establishes grounds to suggest that the issuance of Eurobonds carry enough information to foreign investors in deciding on the location of FDI.Originality/valueThe study is uniquely opening a new frontier to the discussion on how one international capital can be used to bait other foreign capital. It also discusses signalling theory at the macro level.