Does Economic Freedom Improve FDI Inflows in Sub-Saharan Africa?

Abstract

The objective of this study is to investigate the effect of economic freedom on foreign direct investment (FDI) in Sub-Saharan Africa (SSA). To this end, we employed a panel data analysis across 41 countries over the period 2000-2020. We used a two-stage least squares (2SLS) estimation method to address potential endogeneity issues. We found that economic freedom plays a crucial role in enhancing FDI inflows in SSA. Specifically, the results suggest that certain dimensions of economic freedom, such as the size of government and the legal system and property rights. Have a positive effect on FDI inflows in SSA. Conversely, components or dimensions like sound money and regulation have a negative impact. Freedom to trade has a positive sign on FDI. Regardless, these effects are statistically insignificant. Based on these outcomes, SSA countries should prioritize consolidating public spending on infrastructure development and enhancing the quality of investments in human capital formation. Additionally, strengthening the legal framework by ensuring the rule of law and a functional justice system that effectively safeguards the rights of investors is also necessary.