Institutions and foreign direct investments: Evidence from Southern African countries (2009 - 2015).

Abstract

The study sought to analyse the factors that influence FDI inflow in the Southern Africa region with particular emphasis on institutions using panel data of Southern African countries for the period 2009 to 2015. FDI expressed in billions of United States dollars was regressed on institutions, government expenditure (%GDP), market size as proxied by gross domestic product per capita, gross fixed capital formation (%GDP) representing infrastructure development and total trade (%GDP) proxing trade openness. The study ran two separate regression models employing the fixed and random effects models. The first model used a composite measure of institutions which was found by averaging the value of six governance indicators; and the other model employed only the control of corruption to proxy institutions. Results from the first model showed that institutions do not matter in attracting FDI in the region and the second regression model with corruption as a measure of institutions showed that corruption actually has had a positive impact on FDI inflow in the region post the 2008 global financial crisis. From the results of the study, it is recommended that instead of encouraging corruption or not improving institutional quality, responsible authorities should rather improve institutional environment especially reducing corruption and dealing with any bureaucracy or inefficiency that hinders smooth flow of FDI. The Southern African region governments should also conduct due diligence on the kind of FDI and type of investors so that needed investments flow into the region to ensure that positive impact of FDI on economic development will be realized in the long run. In addition, the governments should also revise their expenditures downwards, consider removing trade barriers and implement policies that increase market size in order to attract FDI in their respective countries.