Investment and economic growth: do institutions and economic freedom matter?

Abstract

PurposeThis paper analyzes the effect of institutional quality and economic freedom on investment and economic growth in sub-Saharan Africa (SSA).Design/methodology/approachFocusing on a panel of 27 countries, the study employed the panel fixed and random effect models to analyze data spanning from 2005 to 2018. The study also employed the Wu–Hausman test to determine if the endogeneity problem exists in the model.FindingsThe findings of the study show that individually, an improvement in economic freedom stimulates economic growth while the improvement in institutional quality is effective in spurring investment. However, the interaction effect of improvement in institutional quality and economic freedom is the stimulation of both investment and economic growth. The findings are robust to alternative model specifications.Practical implicationsThe study implies that for SSA countries to effectively achieve higher investment and economic growth outcomes, there is the need to simultaneously strengthen institutional quality and improve economic freedom. Focusing on either of the factors without the other leads to less desirable growth and investment outcomes.Originality/valueThe study examined the combined influence of institutional quality and economic freedom on investment and growth in SSA. To the best of the authors’ knowledge, no study has investigated this in the context of SSA.