The Impact of Governing Institutions on Foreign Direct Investment Flows: Evidence from African Nations

Abstract

Over the last two decades, industrialized nations and multilateral financial institutions have encouraged less developed countries to undertake institutional reforms to hasten socioeconomic development. Implicit in this advice is the idea that reform-minded countries will receive a foreign direct investment (FDI) dividend. But do nations with strong institutions attract proportionally greater levels of foreign direct investment (FDI) than those with weaker institutions? This study addresses that question by evaluating data on FDI inflows for a sample of African nations. We begin with a review of the literature on the determinants of FDI and the link between institutions and FDI flows to emerging economies. Next, we offer hypotheses about the nature of these flows and test them using statistical analysis. The paper concludes by interpreting the results, considering their policy implications, and offering directions for future research.