FDI in Africa and the role of Formal and Informal Institutions

Overview

In recognition of the benefits of foreign direct investment (FDI) – an important channel through which resources, human capital and technological progress are transferred between countries – understanding the determining factors of FDI is an important issue from a developing country perspective. Although Africa has undertaken a programme of political and economic reforms, inward investment remains subdued, partly reflecting increased competition for foreign investment and partly reflecting weak institutions. In view of the critical role of institutions in attracting FDI, a growing literature focuses on the institutional determinants of FDI. Many of these studies, however, do not take account of local informal institutions.

The purpose of this study is to analyse the institutional determinants of FDI in Africa for both national-level formal institutions and local informal institutions.

The objectives of this study are to: (1) Analyse which aspects of formal institutions (for example, rule of law, regulatory quality) are most important for FDI in Africa using national-level data. (2) Analyse the effects of informal institutions (for example, cultural and social norms, political networks, heritage patterns) on FDI in Africa using subnational data. (3) Examine whether the FDI effect of (stronger) informal institutions substitute for (weaker) national institutions.

The contributions of this study are two-fold: To extend the literature on the effects of national-level formal institutions on FDI by analysing (1) the effects of informal institutions; (2) the effects of sub-national explanatory factors, including sub-national informal institutions.

Among other research-related activities, the PhD candidate will (1) Review and extend the literature on the institutional determinants of FDI by focusing on the channels through which local informal institutions can affect FDI. (2) Collect national-level and sub-national data on FDI (the dependent variable) and a set of potential explanatory variables.1 (3) Undertake a quantitative analysis of the determining factors of FDI using panel methods.

Subnational studies of FDI in Africa are limited mainly because of data availability issues. Using a refined unit of analysis to understand the structure and composition of FDI within (sub-national) regions, the aims of the PhD project will involve a data-driven approach to understanding the effects of local informal institutions on FDI. Understanding the FDI effects of local community customary practices can contribute to more sustainable business practices, in line with NTU’s strategic theme of Safety and Sustainability.

Notes

1 NBS has an annual subscription to the ORBIS Crossborder Investment database, which provides a detailed breakdown of data for FDI and M&As by origin and destination, by sector and by subnational region. Data are available from 2013 onwards. Note that NBS cannot guarantee future renewal of its subscription to the database. An alternative source of information includes the World Bank Enterprise Survey database.

References

Fuentelsaz, L., Garrido, E. and Maicas, J. P. (2020), The effect of informal and formal institutions on foreign market entry selection and performance, Journal of International Management, 26, 100735.

Mbalyohere, C. and Lawton, T.C. (2022), Engaging informal institutions through corporate political activity: Capabilities for subnational embeddedness in emerging economies, International Business Review, 31, 101927.