Analysis of government policies, institutions, and inward foreign direct investment: Evidence from sub‐Saharan Africa

• Author: Agyenim Boateng,Franklin Ngwu,Ochuko B. Emudainohwo,Sanjukta Brahma
• Published date: 01 July 2018
• Date: 01 July 2018
• DOI: http://doi.org/10.1002/tie.21942

EMERGING MARKET PERSPECTIVES: AFRICA

Analysis of government policies, institutions, and inward

foreign direct investment: Evidence from sub-Saharan Africa

Ochuko B. Emudainohwo

1

| Agyenim Boateng

2

| Sanjukta Brahma

2

| Franklin Ngwu

3

1

Delta State University, Nigeria

2

Glasgow Caledonian University, Glasgow,

United Kingdom

3

Lagos Business School, Pan-Atlantic

University, Lagos, Nigeria

Correspondence

Agyenim Boateng, Glasgow School of

Business & Society, Glasgow Caledonian

University, Glasgow, United Kingdom.

Email: agyenim.boateng@gcu.ac.uk

This article examines the effects of government policies and institutions on foreign direct

investment (FDI) inflows in sub-Saharan African context using both quantitative and qualitative

approaches. On the quantitative approach, we analyzed the effects of institutions on FDI using

two statistical techniques—canonical cointegration regression (CCR) and fully modified ordinary

least square (FMOLS)—over the period of 1984–2012. We find that political instability, demo-

cratic accountability, and investment risk have significant impact on inward FDI in Nigeria.

Using a trend analysis, our results provide evidence to suggest that liberal government invest-

ment policies have positive influence on FDI inflows. Our qualitative analysis over the

1962–2012 period supports the results of the quantitative analysis.

KEYWORDS

Government policies, Institutions, Inward FDI, sub-Saharan Africa

1|INTRODUCTION

Foreign direct investment (FDI) and its determinants and conse-

quences on economic growth in both developed and developing

countries have been extensively researched in the academic milieu

(see Buckley, Clegg, & Wang, 2007; Dunning, 1998). The mainstream

theoretical perspectives explaining why multinational firms engage in

FDI range from the industrial organization theory, which focuses on a

firm’s behavior as compared with its competitors (Caves, 1971;

Hymer, 1976) and internalization models based on market imperfec-

tions and the transaction cost economics explanation of the bound-

aries of the firm (Buckley & Casson, 1976), to the electric paradigm

(Dunning, 1988, 1993), which provides a holistic approach to explain

the levels and patterns of international production. In search for a

more comprehensive understanding of what determines FDI, Dun-

ning (1998), in his award-winning article, summarizes the key antece-

dents of FDI and points out that while economic factors are

important to FDI inflows, host-country policies and institutions play a

more important role than they once did in the 1970s. Since Dunning’s

(1998) influential article, a number of studies have focused on the

role of government and host-country institutions (see Boateng & Gla-

ister, 1999; Cleeve, 2012; Du, Lu, & Tao, 2008; Henisz, 2000;

Mmieh & Owusu-Frimpong, 2004). These authors argue that institu-

tions and government policies play an increasingly significant role in

explaining the location strategies of multinational enterprises (MNEs).

For example, Du et al. (2008) note that the economic reforms, liberal-

ization of FDI policies, and institutional reforms in the emerging

countries, particularly Brazil, Russia, India, and China (BRIC), are

widely seen as pivotal in attracting FDI inflows and constitute the

driving force behind the economic development of these economies.

Dunning (1998) and Boateng, Hua, Nisar, and Wud (2015) further

contend that host-country institutions and national policy environ-

ment may act as barriers to a firm’s location choice.

The above argument is consistent with institutional theory, which

posits that a country’s institutions influence a firm’s strategic choices

and competitiveness (North, 1990). Bad institutions and unfavorable

government policies increase the cost of doing business in the host

country, while good institutions ensure effective functioning of mar-

ket mechanisms and reduce risks (Ang & Michailova, 2008; Meyer,

Estrin, Bhaumik, & Peng, 2009). In order to attract foreign capital,

many governments of countries in sub-Saharan Africa (SSA), under

the auspices of the International Monetary Fund (IMF) and World

Bank, have also changed their previous restrictive FDI policies to

more liberal policies and embarked on massive reforms to attract FDI

inflows. For instance, SSA countries have implemented the Structural

Adjustment Programme (SAP), which includes liberalization of the

FDI regulatory framework, privatization and rationalization of state-

owned enterprises as a condition to obtain financial support from the

DOI: 10.1002/tie.21942

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