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Foreign Direct Investment, Institution and Industrialisation in Sub-Saharan Africa

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Abstract

Empirical studies have been conducted around the impact of foreign direct investment on industrialisation; however, while they have produced inconsistent inferences, the impact channel of this relationship has also been ignored. This study focuses on the role of institution on foreign direct investment for industrialisation in a panel of 43 Sub-Sahara African countries for the period 1996 through 2018. This study uses manufacturing value added per capita to capture industrialisation and based its empirical evidence on the pooled ordinary least squares, fixed effects and system generalised method of moments methods of estimation. From our empirical analysis, the following findings are established: First, persistence level of industrialisation determines to a large extent, the current industrialisation in sub-Saharan Africa. Second, foreign direct investment exerts a negative and significant impact on industrialisation. Last, when indicators of institution are imposed on foreign direct investment in our model, the negative impact existing between foreign direct investment and industrialisation remains apparent except for the political index of institution that moderates and averts this negative effect although the magnitude is meagre. On the policy ground, this study advocates for institutional policies and reforms that targets economic, political and institutional forms of governance.

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Fig. 1

Source: Authors’ computation based on WDI, 2019 dataset

Fig. 2

Source: Authors’ computation based on WDI, 2019 dataset

Fig. 3
Fig. 4

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Notes

  1. Used interchangeably with governance all through.

  2. (Europe: 206.16%; America and the Caribbean: 85.43%; Asia: 416.59%; Oceania: 2.09%; North Africa: 977.84%; and sub-Saharan Africa: 78.13%) (Authors’ computation based on World Development Indicator (WDI), 2019).

  3. Angola, Benin, Botswana, Burkina Faso, Burundi, Cabo Verde, Cameroon, Central African Republic, Chad, Congo, Dem. Rep., Congo, Rep., Cote d'Ivoire, Equatorial Guinea, Eritrea, Ethiopia, Gabon, Gambia, The, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Tanzania, Togo, Uganda, Zambia, Zimbabwe.

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Acknowledgements

We would like to thank the Receiving Editor and the anonymous referees for their constructive, helpful and timely comments and suggestions that have greatly improved the quality of this paper. The usual caveat applies.

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Authors and Affiliations

  1. Department of Economics, Olabisi Onabanjo University, Ago-Iwoye, Nigeria

    Musa Oduola

  2. Department of Economics, University of Lagos, Lagos, Nigeria

    Mustapha O. Bello

  3. Department of Economics, Distance Learning Institute, University of Lagos, Lagos, Nigeria

    Rahmon Popoola

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  1. Musa Oduola
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  2. Mustapha O. Bello
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Correspondence to Mustapha O. Bello.

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Appendices

Appendix 1 Persistency of Industrialisation

 

IND

L.IND

IND

1

 

L1.IND

0.9542

1

  1. IND represents industrialisation (manufacturing value added), and it is persistent which further justifies the usage of GMM.

Appendix 2 List of countries. Source: IMF Regional Economic Outlook in sub-Saharan Africa: A road to recovery (2020)

Resource rich

Non-res. rich

Upper mid inc

Lower mid

Low income

Angola

Benin

Botswana

Angola

Burkina Faso

Equatorial Guinea

Burundi

Equatorial Guinea

Benin

Burundi

Congo Dem. Rep

Cabo Verde

Gabon

Cabo Verde

Central African Republic

Nigeria

Comoros

Namibia

Cameroon

Chad

Guinea

Eritrea

South Africa

Comoros

Congo, Dem. Rep

Gabon

Eswatini

Mauritius

Congo, Rep

Eritrea

Congo Rep.,

Ethiopia

Seychelles

Côte d'Ivoire

Ethiopia

Chad

Gambia

 

Ghana

Gambia, The

Botswana

Guinea-Bissau

 

Kenya

Guinea

Zambia

Kenya

 

Lesotho

Guinea-Bissau

Sierra Leone

Lesotho

 

Mauritania

Liberia

Mali

Madagascar

 

Nigeria

Madagascar

Namibia

Malawi

 

Sao Tomé and Principe

Malawi

Niger

Mauritius

 

Senegal

Mali

Cameroon

Mozambique

 

Tanzania

Mozambique

Zimbabwe

Rwanda

 

Zambia

Niger

Tanzania

Sao Tomé & Príncipe

 

Zimbabwe

Rwanda

Ghana

Senegal

  

Sierra Leone

Cen. Africa Republic

Seychelles

  

Somalia

South Sudan

Togo

  

South Sudan

Burkina Faso

Uganda

  

Sudan

Liberia

   

Togo

South Africa

   

Uganda

Côte d’Ivoire

    

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Oduola, M., Bello, M.O. & Popoola, R. Foreign Direct Investment, Institution and Industrialisation in Sub-Saharan Africa. Econ Change Restruct 55, 577–606 (2022). https://doi.org/10.1007/s10644-021-09322-y

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