Business Regulations and Foreign Direct Investment in Sub-Saharan Africa: Implications for Regulatory Reform

  • Ben Katoka
  • Huck-ju Kwon
Chapter

Abstract

This paper uses annual changes in distance-to-frontier scores for a set of the World Bank’s Doing Business indicators to examine the effect of business regulation variables on foreign direct investment inflows (FDI) in sub-Saharan Africa (SSA) over the period from 2005 to 2014. With random time effect estimates, for a panel of 44 SSA countries, the study finds that when account is taken of factors including population size, revenue level, natural resources, inflation, and governance effectiveness, FDI is significantly responsive to changes in starting a business, trading across borders, and protecting investor components of the World Bank’s Doing Business. With these findings, this paper recommends regulatory reform for a better business environment for sustainable FDI flow to the SSA region.

JEL Codes

F21 G18 O55 Q01 O19 

References

  1. Agung, G. N. (2009). Times Series Data Analysis Using EViews. Hoboken, NJ: Wiley.Google Scholar
  2. Anyanwu, J. C. (2011, September). Determinants of Foreign Direct Investment Inflows to Africa, 1980–2007. African Development Bank Group Working Paper (pp. 1–31).Google Scholar
  3. Asiedu, E. (2006). Foreign Direct Investment in Africa: The Role of Government Policy, Institutions and Political Instability. World Economy, 29(1), 63–77.CrossRefGoogle Scholar
  4. Asiedu, E. (2013). Foreign Direct Investment, Natural Resources and Institution (Working Paper). London: International Growth Centre.Google Scholar
  5. Asiedu, E., & Lien, D. (2011). Democracy, Foreign Direct Investment and Natural Resources. Journal of International Economics, 84, 99–111.CrossRefGoogle Scholar
  6. Baltagi, B. H. (2013). Econometric Analysis of Panel Data. Hoboken, NJ: Wiley.Google Scholar
  7. Bartels, F. L., Alladina, S. N., & Lederer, S. (2009). Foreign Direct Investment in Sub-Saharan Africa: Motivating Factors and Policy Issues. Journal of African Business, 10, 141–162.CrossRefGoogle Scholar
  8. Basu, A., & Srinivasan, K. M. (2002). Foreign Direct Investment in Africa: Some Case Studies (Working Paper No. 02/61). Washington, DC: International Monetary Fund.CrossRefGoogle Scholar
  9. Bayraktar, N. (2013). Foreign Direct Investment and Investment Climate. Procedia Economics and Finance, 5, 83–92.CrossRefGoogle Scholar
  10. Billingtonm, N. M. (1999). The Location of Foreign Direct Investment: An Empirical Analysis. Applied Economics, 31, 65–76.CrossRefGoogle Scholar
  11. Borensztein, E., De Gregorio, J., & Lee, J.-W. (1998). How Does Foreign Direct Investment Affect Economic Growth? Journal of International Economics, 45, 115–135.CrossRefGoogle Scholar
  12. Busse, M., & Groizard, J. L. (2008). Foreign Direct Investment, Regulations and Growth. The World Economy, 31(7), 861–886.CrossRefGoogle Scholar
  13. Busse, M., & Hefeker, C. (2007). Political Risk, Institutions and Foreign Direct Investment. European Journal of Political Economy, 23(2), 397–415.CrossRefGoogle Scholar
  14. Chakraborty, C., & Basu, P. (2002). Foreign Direct Investment and Growth in India: A Co-integration Approach. Applied Economics, 34, 1061–1073.CrossRefGoogle Scholar
  15. Corcoran, A., & Gillanders, R. (2014). Foreign Direct Investment and the Ease of Doing Business. Reviews of World Economics, 15(1), 103–126.Google Scholar
  16. Dabla-Norris, E., Honda, J., Lahreche, A., & Verdier, G. (2010). FDI Flows to Low-Income Countries: Global Drivers and Growth Implications (IMF Working Paper No. 10/132) (pp. 1–39).Google Scholar
  17. Desai, M., Gompers, P., & Lerner, J. (2003). Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe (Working Paper No. 10165). Cambridge, MA: NBER.Google Scholar
  18. Djankov, S., McLiesh, C., & Ramalho, R. M. (2006). FDI Regulation and Growth. Economics Letters, 92(3), 395–401.CrossRefGoogle Scholar
  19. Dunning, J. (2000). The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity. International Business Review, 9(2), 163–190.CrossRefGoogle Scholar
  20. Eifert, B. P. (2009). Do Regulatory Reforms Stimulate Investment and Growth? Evidence from the Doing Business Data, 2003–07 (Working Paper No. 159). Washington, DC: Center for Global Development.Google Scholar
  21. Greene, W. H. (2011). Econometric Analysis. Prentice Hall (7th ed.). Boston, MA: Pearson.Google Scholar
  22. Hanusch, M. (2012). The Doing Business Indicators, Economic Growth and Regulatory Reform (Working Paper No. 6176). Washington, DC: World Bank.CrossRefGoogle Scholar
  23. Jayasuriya, D. (2011). Improvements in the World Bank’s Ease of Doing Business Rankings: Do They Translate into Greater Foreign Direct Investment Inflows? (Working Paper No. 5787). Washington, DC: World Bank Policy Research.CrossRefGoogle Scholar
  24. Kaufmann, D., Aart, K., & Mastruzzi, M. (2010). The Worldwide Governance Indicators: Methodology and Analytical Issues. World Bank Policy Research (Working Paper No. 5430).Google Scholar
  25. Khadaroo, A. J., & Seetanah, B. (2010). Transport Infrastructure and Foreign Direct Investment. Journal of International Development, 22, 103–123.CrossRefGoogle Scholar
  26. Klapper, L., & Love, I. (2010). The Impact of Business Environment Reforms on New Firm Registration (Working Paper No. 5493). Washington, DC: World Bank Policy Research.CrossRefGoogle Scholar
  27. Lim, E. (2001). Determinants of, and the Relation Between, Foreign Direct Investment and Growth: A Summary of the Recent Literature (Working Paper No. 01/175). International Monetary Fund, Middle Eastern Department.CrossRefGoogle Scholar
  28. Morris, R., & Aziz, A. (2011). Ease of Doing Business and FDI Inflow to Sub-Saharan Africa and Asian Countries. Cross Cultural Management: An International Journal, 18(4), 400–411.CrossRefGoogle Scholar
  29. Morrisset, P., & Andrews-Johnson, K. (2004). The Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment. Washington, DC: World Bank.Google Scholar
  30. Mottaleb, K. A., & K. Kalirajan. (2010). Determinants of Foreign Direct Investment in Developing Countries a Comparative Analysis. The Journal of Applied Economic Research, 4(4), 369–404.CrossRefGoogle Scholar
  31. Naudé, W. A., & Krugell, W. F. (2011). Investigating Geography and Institutions as Determinants of Foreign Direct Investment in Africa Using Panel Data. Applied Economics, 39, 1123–1233.Google Scholar
  32. Nnadozie, E., & Njuguna, A. E. (2011). Investment Climate and Foreign Direct Investment in Africa. Paper presented at the 6th African Economic Conference in Addis Ababa, Ethiopia on 26–28 October 2011. Accessed 19 Jan 2015.Google Scholar
  33. OECD. (2011). Policy Framework for Investment. http://www.oecd.org/investment/pfi.htm. Accessed 20 Nov 2015.
  34. Onyeiwu, S., & Shrestha, H. (2004). Determinants of Foreign Direct Investment in Africa. Journal of Developing Societies, 20, 89–106.CrossRefGoogle Scholar
  35. Shatz, H., & Venables, A. J. (2000). The Geography of International Investment (Working Paper No. 2338). Washington, DC: World Bank Policy Research.Google Scholar
  36. Strawson, T. (2013). Harnessing All Resources to End Poverty (Working Paper). Bristol: Development Initiatives.Google Scholar
  37. Sun, X. (2002). How to Promote FDI? The Regulatory and Institutional Environment for Attracting FDI. Paper presented at the Capacity Development Workshops and Global Forum on Reinventing Government on Globalization, Role of the State and Enabling Environment, Marrakech, MA.Google Scholar
  38. UNCTAD. (2006). FDI from Developing and Transition Economies: Implications for Development (World Investment Report). New York and Geneva.Google Scholar
  39. UNCTAD. (2014). Investing in the SDGs: An Action Plan (World Development Report). New and Geneva.Google Scholar
  40. UNCTAD. (2015). Reforming International Investment Governance. New York and Geneva: World Development Report.Google Scholar
  41. UNIDO. (2008). Creating an Enabling Environment for Private Sector Development in Sub-Saharan Africa. Vienna: UNIDO.Google Scholar
  42. Waglé, S. (2011). Investing Across Borders with Heterogeneous Firms: Do FDI-Specific Regulations Matter? (Working Paper Series). Washington, DC: World Bank Policy Research.CrossRefGoogle Scholar
  43. Walsh, J. P., & Yu, J. (2010). Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach (Working Paper No. 10/187). International Monetary Fund. Available online at: https://www.imf.org/external/pubs/ft/wp/2010/wp10187.pdf. Accessed 10 Mar 2016.
  44. World Bank. (2010). Attracting FDI: How Much Does Investment Climate Matter? (Policy Note No. 327). Washington, DC: World Bank.Google Scholar
  45. World Bank. (2013). Financing for Development Post 2015. Washington, DC.Google Scholar
  46. World Bank. (2014). Understanding Regulations for Small and Medium-Size Enterprises (Doing Business Report). Washington, DC.Google Scholar
  47. World Bank. (2015). From Billions to Trillions: Transforming Development Finance. Retrieved from http://siteresources.worldbank.org/DEVCOMMINT/Documentation/23659446/DC2015-0002(E)FinancingforDevelopment.pdf. Accessed 15 Jan 2016.
  48. World Bank. (2016). Measuring Regulatory Quality and Efficiency (Doing Business Report). Washington, DC.Google Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Ben Katoka
    • 1
  • Huck-ju Kwon
    • 1
  1. 1.Graduate School of Public AdministrationSeoul National UniversitySeoulSouth Korea

Personalised recommendations