Foreign Direct Investments and Economic Growth in Sub-saharan African Countries: the Role of Governance

Abstract

ABSTRACT Sub-Saharan African countries have been noted to encounter challenges when it comes to attracting financial flows because of their underdeveloped financial markets and low savings rate which would help speed up the growth of the region. Countries in the region have resorted to foreign direct investment inflows since extant works have argued that foreign direct investment inflows induce economic growth in the presence of institutions. As a result, the study examined the role of governance/institutions in enhancing the relationship between FDI and economic growth in SSA. The study employed the explanatory design and quantitative research approach and also collected data on 45 SSA countries out of 49 nations in the region. The study utilised the two-step System Generalised Method of Moments estimator to analyse the results. The findings showed that FDI has a significant inverse relationship with economic growth while institutional quality exhibited a positive connection with economic growth. Particularly, all the governance indicators had a significant positive influence on economic growth with the exception of rule of law which had an insignificant impact on growth. The findings further revealed that institutions moderate the relationship between FDI and growth in SSA. The study recommended that SSA countries with limited natural resources should focus on inflows from non-governmental agencies, international organisations or some donor countries other than FDI