Financial Development, Country-Level Corporate Governance, and Foreign Direct Investment in Sub-Saharan Africa

Abstract

A well-functioning financial system and transparent corporate governance structures are crucial for attracting foreign direct investment (FDI). Investors are cautious about opaque governance practices at the firm and country levels due to the risks they pose to their investments in an environment with poor corporate oversight. In effect, corporate governance plays a critical role in the attitudes of investors towards making investments overseas. This study examined the complementary role of corporate governance in the relationship between financial development and FDI in sub-Saharan Africa (SSA). From 2010 to 2019, the study sample comprised a panel of 48 SSA economies with available data on the desired variables. Estimations were performed under the Systems Dynamic General Method of Moments (SD-GMM) approach. Findings from the study divulged significant positive effects of financial development and country-level governance on FDI. The study found that corporate governance significantly interacts with financial development to influence FDI in SSA. Specifically, rule of law, voice and accountability, political stability and absence of violence/terrorism, and regulatory quality significantly moderate the relationship between financial development and FDI among SSA economies. Policymakers are advised to conduct periodic evaluations of the financial institutions’ stability to ensure they consistently deliver the anticipated benefits. To improve the overall benefits enjoyed by SSA economies from FDI inflows, attention needs to be paid to the approaches taken to control corruption as well as those in place to facilitate voice and accountability and governance quality.