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The central concern of this paper is to respond to the question: why do FDI inflows go where they do in African countries? An understanding of such factors will assist African policymakers to formulate and execute policies for attracting FDI. Our estimation results from cross-country regressions for the period 1996-2008 indicate that: (i) there is a positive relationship between market size and FDI inflows; (ii) openness to trade has a positive impact on FDI flows; (iii) higher financial development has negative effect on FDI inflows; (iv) the prevalence of the rule of law increases FDI inflows; (v) higher FDI goes where foreign aid also goes; (vi) agglomeration has a strong positive impact on FDI inflows; (vi) natural resource endowment and exploitation (such as oil) attracts huge FDI; (vii) East and Southern African sub-regions appear positively disposed to obtain higher levels of inward FDI. The key policy implications are discussed.
Key Words: Foreign direct investment; Factors driving FDI; African countries.
JEL Classification Numbers: F21, F23, O19.
1.INTRODUCTION
Foreign direct investment (FDI), as a key element of the globalization and of the world economy, is a driver of employment, technological progress, productivity improvements, and ultimately economic growth. It plays the critical roles of filling the development, foreign exchange, investment, and tax revenue gaps in developing countries (Smith, 1997; Quazi, 2007). In particular, it can play an important role in Africas development efforts, including: supplementing domestic savings, employment generation and growth, integration into the global economy, transfer of modern technologies, enhancement of efficiency, and raising skills of local manpower (Dupasquier and Osakwe, 2003; Anyanwu, 2003).
However, Africa has never been a major recipient of FDI flows and so lags behind other regions of the world. On an annual average basis, the regions share of global FDI inflows was 2.6 percent in the period 1980-89; 1.9 percent in the period 1990-1999; and 3.2 percent in the period 20002009. During the same periods, the Asian region received FDI inflows 14.2 percent, 19.1 percent, and 19.1 percent of total global inflows, respectively. One key question is: Why does Africa not attract much FDI? The answer to this question is important in economics, business, politics, and academia in the Continent and hence calls for further analysis of the forces driving FDI.