In recognition of the benefits of foreign investment – an important channel through which resources, human capital and technological progress are transferred between countries – understanding the determining factors of foreign direct investment (FDI) in recipient countries remains an important issue from a developing country perspective. Although Africa has undertaken a programme of liberalisation during the 1990s, inward investment remains subdued, partly reflecting increased competition for foreign investment and partly reflecting a lingering objection to foreign capital.
In view of the critical role of the private sector in terms of overall development, a growing literature focuses on the need to prioritise reforms of the business environment. At its core, business environment reforms involve reducing entry barriers and stimulating levels of efficiency and innovation as well as reducing the transaction costs of doing business, decreasing risks and providing greater certainty in terms of laws, regulations and government policies (DCED 2008; Luiz et al. 2019). While economic policy reforms have largely removed the direct barriers to foreign investment, many indirect barriers remain in place with the consequence that inward investment is constrained to levels less than otherwise.
The recent literature assesses a broad spectrum of potential constraints on firms (Dollar et al. 2005, 2006; Ayyagari et al. 2008). Dollar et al. (2006), for example, find that a better investment climate increases the probability to export and invest abroad. More specifically, time and monetary measures of hard infrastructure (such as electricity and telecommunications) as well as soft infrastructure (for example, customs administration) help explain differences in FDI. The importance of institutions for foreign investment and development have also been highlighted (Dollar and Kraay 2003; Glaeser et al. 2004; Rodrik et al. 2004). Institutions create an environment conducive for the creation and operation of firms. This study will focus on the linkages between infrastructure, institutions and FDI.
Ayyagari, M., Demirgüç-Kunt, A. and Maksimovic, V. (2008), How important are financing constraints? The role of finance in the business environment, World Bank Economic Review, 22(3), 483-516.
DCED (2008), Supporting business environment reforms: Practical guidance for development agencies, Paris: Donor Committee for Enterprise Development.
Dollar, D. and Kraay, A. (2003), Institutions, trade, and growth, Journal of Monetary Economics, 50(1), 133-162.
Dollar, D., Hallward-Driemeier, M. and Mengistae, T. (2005), Investment climate and firm performance in developing economies, Economic Development and Cultural Change, 54(1), 1-31.
Dollar, D., Hallward-Driemeier, M. and Mengistae, T. (2006), Investment climate and international integration, World Development, 34(9), 1498-1516.
Glaeser, E. L., La Porta, R., López-de-Silanes, F. and Shleifer, A. (2004), Do institutions cause growth?, Journal of Economic Growth, 9(3), 271-303.
Luiz, J. M., Ganson, B. and Wennmann, A. (2019), Business environment reforms in fragile and conflict-affected states: From a transactions towards a systems approach, Journal of International Business Policy, 2(3), 217-236.
Rodrik, D., Subramanian, A. and Trebbi, F. (2004), Institutions rule: The primacy of institutions over geography and integration in economic development, Journal of Economic Growth, 9(2), 131-165.
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