Country-level corporate governance and foreign direct investment in Africa

• Pages: 1133-1152
• Date: 07 October 2019
• Published date: 07 October 2019
• DOI: https://doi.org/10.1108/CG-07-2018-0259
• Author: Otuo Serebour Agyemang,Christopher Gbettey,John Gartchie Gatsi,Innocent Senyo Kwasi Acquah
• Subject Matter: Strategy

Country-level corporate governance and

foreign direct investment in Africa

Otuo Serebour Agyemang, Christopher Gbettey, John Gartchie Gatsi and

Innocent Senyo Kwasi Acquah

Abstract

Purpose –The purpose of this study is to examinethe link between country-level corporate governance

and foreigndirect investment in African economies for the period 2009-2015.

Design/methodology/approach –The authors use annualpanel data of 40 African economies over the

period of the study and use the system generalized method of moments (GMM) to establish the

relationshipbetween country-level corporategovernance and foreign direct investment.

Findings –The authors find thatAfrican economies characterized by firms with highethical values tend

to attract a great deal of foreign direct investment. In addition, they highlight that when an economy is

associatedwith effective corporate boards, it tends to attractmuch foreign direct investment. Further,this

study reveals thatthe level of minority shareholders’ interests’protection in an economy has a significant

positive relationship with foreign direct investment. Finally, they document a negative relationship

betweeneffectiveness of regulation of securitiesand exchanges and foreign direct investment.

Practical implications –It is advised that sound andimplementable corporate governance structures

devoid of political interferences should be put in place in African economies, if the aim of usingforeign

direct investment to mitigate poverty by 2015 as part of the Millennium Development Goals is to be

attained.

Originality/value –Empiricists have devoted considerable effort to estimate the factors that influence

the level of foreign direct investment into African economies without taking into consideration the

corporate governance structures in these economies. However, this paper seeks to examine the

relationship between country-level corporate governance structures and foreign direct investment in

Africaneconomies.

Keywords Foreign direct investment, Ethical behaviour of firms, African economies,

Country-level corporate governance, Efficacy of corporateboards

Paper type Research paper

Introduction

Foreign direct investment (FDI), a major constituent of globalization and of the world

economy, is a driving force behind job creation, progress in technology, productivity

enhancement and, eventually, economic growth (Anyanwu, 2012). Its role in economic

development, foreign exchange stabilization, investments and tax revenue mobilization in

both developed and developing economies cannot be overemphasized (Anyanwu, 2012;

Quazi, 2007). Particularly, it plays a significant role in development issues in African

economies, which encompass job creation, human capital development, efficiency

enhancement, transfer of modern technology and global economy integration (Dupasquier

and Osakwe, 2003;Anyanwu,2003,2012).

Africa has been witnessing a surge in foreign direct investment. It has been described as

the fastest-growing region for foreign direct investment globally. The region enjoyed a 65

per cent increase in capital investment in 2014 over the previous year, to an estimated

figure of US$87bn. Further, the number of projects under foreign direct investment in the

Otuo Serebour Agyemang

and Christopher Gbettey

are both based at the

School of Business,

University of Cape Coast,

Cape Coast, Ghana.

John Gartchie Gatsi is

based at the Department of

Finance, University of Cape

Coast, Cape Coast, Ghana.

Innocent Senyo

Kwasi Acquah is based at

the School of Business,

University of Cape Coast,

Cape Coast, Ghana.

Received 31 July 2018

Revised 3 February 2019

Accepted 24 March 2019

DOI 10.1108/CG-07-2018-0259 VOL. 19 NO. 5 2019, pp. 1133-1152, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1133

continent increased by 6 per cent in 2014. It is worth noting that there is a balance between

the two halves of the region in regards to foreign direct investment: capital investment into

sub-Saharan Africa rose from US$42bn to US$61bn while that of North Africa more than

doubled from US$10bn to US$26bn. This suggests that since the financial crisis, foreign

direct investment into African countries has been less volatile than global inflows. However,

one key question is “Why has Africa attracted much FDI?” As a matter of evidence, to some

extent, foreign direct investment into Africa has been attributed to some external

developments (UNCTAD, 2015).

Evidence on the relevance of external development in serving as a determinant of foreign

direct investment has been provided lately. In their study, Chuhan et al. (1998) argued that

foreign direct investment is more sensitive to external factors. In the same vein, Calvo et al.

(1993) revealed that external factors play a relevant role in determining foreign direct

investment. In addition, Fernandez-Arias and Montiel (1995) highlighted that enhanced

external conditions are transmitted both directly and indirectly to foreign direct investment.

Further, Anyanwu (2012) foundthat the level of foreign direct investment in African countries

is influenced by external factors of quality of electricity, quality of roads and other

telecommunication infrastructures.

In tandem with external factors, the institutionalization of good corporate governance

mechanisms in economies can help smooth out asymmetric information challenges

between countries and private sector agents. Corollary to this, good corporate governance

should be taken into account when examining the driving forces of foreign directinvestment

into an economy. Not only external factors and political governance issues but also the

issues of corporate governance are relevant in influencing the level of foreign direct

investment into an economy. While foreign direct investment may be influenced by

efficiency of the judiciary or the rule of law, a frequently unnoticed element is the role

corporate rules play in determiningthe level of foreign direct investment in an economy.

The major issue is that good corporate governance mechanisms reduce information

asymmetry, prevent both adverse selection and moral hazards and allow complete

contracts, which eventually reduces agency problems. There is an incentive on the part of

insiders to disclose information with regards to good investment projects and also have an

incentive to hide information when investment projects are not going on well or when they

have been engaging in opportunistic and self-interestedness behavior in regard to the

running of their firms. Investing individuals are aware that bad information is sometimes

hidden and as a result, act accordingly, raising the returns required or failing to investat all.

Contrariwise, where accurate and credible information are made available on time, the

possibility of resource diversion is low. With this, there is a very high possibility that

resources will be matched with potential investment projects. To ensure that resources are

always used efficiently, investors should have the chance to implicitly or explicitly discipline

insiders who tend to hide information for their selfish gains and good corporate governance

plays a significant role in compelling insiders to be accountable. However, such

accountability elements are improved when investing individuals’ rights and powers are

unequivocally defined and they possess the capacity to coordinate their actions that can

eventually lead to conflict mitigation(Dyck, 2001).

In this context, our paper examines how country-level corporate governance structures

influence the level of foreign direct investment into African economies. Even though the

relationship between country-level corporate governance and the level of foreign direct

investment is somewhat scant, there are some extant studies that have concluded that the

presence of good corporate governance institutions leads to increased foreign direct

investment in an economy (Johnson et al.,2000;Klapper and Love, 2004). However, this

common view could be questioned in developing countries, in particular, African countries

in which markets are imperfect and incomplete, and corporate governance structures have

evolved partially. At a time when many African countries are putting in place some

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