Are Resource-Rich Countries More Attractive than Countries with Good Institutions to Foreign Direct Investors in Sub-Saharan Africa?

Abstract

Africa is no longer behind in the race of acquiring global share of foreign direct investment (FDI) compared to other developing regions. This study uses FDI dataset of 27 sub-Saharan African (SSA) countries and examines what drives the recent trend of higher FDI flows to Africa. A variety of empirical techniques (e.g. cross-section OLS, panel fixed effects and dynamic GMM) are employed for identifying main drivers of FDI in African countries. The finding of this research suggests that resource endowment is the main driver attracting FDI to SSA countries. More specifically, empirical estimates suggest that a one-standard deviation increase in resource endowment in the SSA countries is associated with an increase in FDI ranging from 34% to 83%. Empirical result also suggests that between institutions and resource endowment, resource endowment is the most robust determinant of FDI in SSA countries.