Effect of institutional quality on Foreign Direct Investment: a case of selected Eastern African countries
Date
2023
Authors
Musili, D. M.
Journal Title
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Publisher
Strathmore University
Abstract
Empirical evidence points to a positive relationship between Foreign Direct Investment (FDI) and economic growth, especially in developing economies. However, research shows that multiple country-specific factors influence FDI inflows to respective countries, for example, the policy environment. Data show that while investment inflows have increased in Asian countries, and in Northern and Southern Africa, FDI inflows to Eastern Africa have decreased in recent years, with the Covid-19 pandemic that restricted international capital flows exacerbating the issue. Given the reduced FDI inflows in the Eastern Africa region in recent years and the fact that it is important to increase the attractiveness of Eastern African states to foreign investors to ensure sustainable development in the region, this study examined the effect of institutional quality factors (political stability, government effectiveness, regulatory quality, control of corruption, rule of law and voice and accountability) on FDI in East Africa. The research was grounded on the Eclectic Paradigm (Ownership-Location-Internationalization- OLI theory) and the institutional FDI fitness theory. A positivist philosophy focused on quantitative analysis of the relationship between the selected research variables was adopted. The interaction between institutional quality factors and FDI was analysed using panel data analysis covering Kenya, Tanzania, Rwanda, Burundi, Ethiopia, and Uganda over the period from 2005 to 2021. A panel regression model was used to determine the interaction between the research variables. Cointegration tests revealed there existed a long-run relationship between institutional quality factors and foreign direct investment in the Eastern Africa region. Panel regression results showed that 58.95% of foreign direct investment in the Eastern Africa region can be predicted by institutional quality factors. The study established that overall, institutional quality factors have a positive and significant effect on the volume of foreign direct investment in the Eastern African region and calls on Eastern African countries to embrace the role of institutions and good governance in enhancing FDI inflows. To enhance foreign direct investment (FDI) inflows, it is recommended that East African states develop and enforce policies that promote investment in the private sector. This can be achieved by leveraging institutional quality metrics as a foundation for attracting investment into the different countries.
Keywords: Institutional Quality, Foreign Direct Investment
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Citation
Musili, D. M. (2023). Effect of institutional quality on Foreign Direct Investment: A case of selected Eastern African countries [Strathmore University]. http://hdl.handle.net/11071/13384