Institutional structures and the strength of investor confidence in Africa

Abstract

Purpose This paper aims to examine the role of country-level institutional structures in strengthening the level of investor confidence in Africa while controlling for real GDP growth, interest rate spread, inflation and country credit rating. Design/methodology/approach The paper uses panel data for the period 2009-2013. It takes into account the rule of law, political stability, regulatory quality, voice and accountability, control of corruption and property rights as potential institutional drivers of the level of investor confidence. These factors are based on their relative relevance from the extant literature. Correlated panels-corrected standard errors model was used to establish the relationship between the institutional structures and the strength of investor confidence. Findings The overall results show that rule of law, voice and accountability, property rights and political stability exhibit significant positive relationship with the strength of investor confidence in African economies. This implies that asking African economies to strengthen these institutional structures will result in enhanced investor confidence in their economies. This suggests that the establishment of these institutional structures is an effective tool to enhance investor confidence in African economies. Practical implications In addition to the long-term goal of promoting economic reforms, a corresponding long-term goal of strengthening institutional structures in African economies should be taken into consideration. Instead of waiting for their economic reforms to take effect, governments in African countries can, to some degree, attract investors into their economies by establishing credible institutional structures. Originality/value This paper contributes to the knowledge on how country-level institutional structures influence the level of investor confidence in the context of Africa.