africa fdi transportation

8/9/2019 Africa FDI Transportation

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Determinants of FDI: Lessons from African Economies

Rojid Sawkut, Seetanah Boopen, Ramessur-Seenarain Taruna & Sannassee Vinesh1

Abstract

The volume of FDI that flows to Africa is not only very low as a share of total global

FDI flows or even as a share of FDI flows to developing countries, but also the share

is on a steady downward trend for three decades. In 200 however, FDI inflow to Africa rose by 20! to "# billion, twice their 200$ level. The aim of this study is to

analyse the various potential determinants of FDI for a sample of African economies

and a panel data analysis has been used in the study. The time frame for analysis is a

%&'year period, %((0'200& and 20 African countries are involved in this study, based

on data availability. )hen we performed the *ausman test specification, the test

recommended the use of fi+ed effects model. All the e+planatory variables as specified

in the econometric functions are seen to be significant elements in attracting FDI in

Africa and are in line with recent empirical evidences

1 Rojid Sawkut and Sannasee Vinesh are lecturers in finance at Uniersit! of "auritius# Seetanah

$oo%en & Seenarain 'aruna are lecturers in Finance and Economics res%ectiel! at Uniersit! of'echnolo(! "auritius) Authors email addresses are: [email protected] * [email protected] ;[email protected]; [email protected]

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1. Introduction

'he olume of FDI that flows to Africa is not onl! er! low as a share of total (lo+al

FDI flows or een as a share of FDI flows to deelo%in( countries# +ut also the share

is on a stead! downward trend for three decades) Africa accounts for just , to - %er

cent of (lo+al flows# down from a %eak of . %er cent in the mid/102s# and less than 0

%er cent of deelo%in(/countr! flows com%ared to an earlier %eak of ,3 %er cent in

10. 4UNCTAD (2005))) In ,22.# FDI inflow to Africa rose +! ,25 to 6-. +illion#

twice their ,227 leel) Followin( su+stantial increases in commodit! %rices# man!

'89s# %articularl! those from deelo%ed countries alread! o%eratin( in the re(ion#

si(nificantl! e%anded their actiities in oil# (as and minin( industries 4U89'AD

4,22;;,)

'he ,7 countries in Africa classified +! the > %er

cent of the total) 'he to% fifth 412 out of 73 countries; account for 32 %er cent# and the

+ottom half account for less than > %er cent) 'his trend has held for at least the last

three decades# with the to% 12 countries accountin( for more than > %er cent of the

continent?s total FDI inflows) In Su+ Saharan Africa# the %referred FDI destinations

were: An(ola# E=uatorial @uinea# 8i(eria and South Africa)

"an! studies in literature hae dealt with the issue of FDI and their %otential +enefits

for deelo%in( countries in terms of jo+ creation o%%ortunities# technolo(! transfers#

and (rowth and deelo%ment) 'here hae also +een seeral studies on the

determinants of FDI in deelo%ed countries and deelo%in( countries althou(h all

deelo%ed countries or all deelo%in( countries cannot +e (rou%ed to(ether (ien

their different economic conditions) 'here are =uite a few studies that concentrate on

a re(ion and !et er! few on the African re(ion) 'o close this (a% in eistin(

literature# the aim of this stud! is to anal!se the arious %otential determinants of FDI

for a sam%le of African economies) 'he %eriod under consideration here is 1002/,22>)

, Fi(ures 1and , in a%%endi show how FDI in the world has +een distri+uted around the major re(ion1000 to ,22- and ,22>/2. res%ectiel!)


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'he increasin(l! si(nificant role of FDI in the (rowth d!namics of countries has

created much research interest amon( scholars and much research has +een focused

on the determinants of FDI and has (enerall! identified the followin( factors namel!

com%aratie la+our costs# countr! sie# economic o%enness nature of echan(e rate

re(ime return on inestment and %olitical factors) "an! of the studies include

%rimaril! deelo%ed countries in their sam%le and most of those which include

su+stantial num+ers of less deelo%ed countries 4e)( Schneider and Fre!# 103> and

@astana(a and 8u(ent# 1003; are estimated with %ure cross sections)


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%roduction facilities in forei(n markets +ecause trans%ortation costs are too hi(h to

sere these markets throu(h e%orts) 'his could either +e directl! related to the actual

nature of the (ood# either +ein( a hi(h +ulk item or a serice that needs to +e %roided

on site# or due to %olic! factors such as tariff rates# im%ort restrictions# or issues of

market access that makes %h!sical inestment adanta(eous oer serin( the market

throu(h e%orts) Location adanta(e also em+odies other characteristic 4economic#

institutional and %olitical; such as lar(e domestic markets# aaila+ilit! of natural

resources# an educated la+or force# low la+or cost# (ood institutions 4the clarit! of

countr!?s law# efficienc! of +ureaucrac! and the a+sence of corru%tion;# %olitical

sta+ilit!# cor%orate and other ta rates amon( others)

$ende/8a+ende and Slater 41003; inesti(ate +oth the short/run and lon(/runlocational determinants of FDI under the +road cate(ories of cost/related# inestment

enironment im%roin( and other macroeconomic factors) 'he short/run d!namics

indicate that Euro%ean inestment in the 'hai manufacturin( sector has +een more

res%onsie to the macroeconomic factors) 'he lon(/run d!namics on the other hand

su((est that Euro%ean inestment has +een more res%onsie to the inestment

enironment im%roin( factors) In %articular# there is eidence to su((est that the 'hai

manufacturin( sector is losin( its cost/related com%aratie adanta(e)

Dar# Cresle! and "alik 4,227; studied the causalit! and lon(/term relationshi%

+etween Forei(n Dirct Inestment 4FDI;# economic (rowth and other socio/%olitical

determinants) Althou(h a considera+le literature (ies the eidence of relationshi%

+etween FDI and economic (rowth) 'heir %a%er considers economic (rowth#

echan(e rate and leel of interest rates# unem%lo!ment# and %olitical sta+ilit! as

determinants of the leel of FDI inflows for Cakistan oer the %eriod 102/,22,)

Almost all aria+les are found to hae the theoreticall! e%ected si(ns with two/wa!causalit! relationshi%) 'he %resent stud! also estimates an error correction model +!

ordinar! least s=uares# +ased on cointe(ratin( VAR 4,;)

8unnenen 4,22,; ar(ues that there is a startlin( (a% +etween# alle(edl!# (lo+aliation/

induced chan(es in international com%etition for forei(n direct inestment 4FDI; and

recent em%irical eidence on the relatie im%ortance of determinants of FDI in

deelo%in( countries) e shows that sur%risin(l! little has chan(ed since the late

1032s) 'raditional market/related determinants are still dominant factors) Amon( non/traditional FDI determinants# onl! the aaila+ilit! of local skills has clearl! (ained


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im%ortance) As concerns the interface +etween trade %olic! and FDI# he finds that the

tariff jum%in( motie for FDI had lost much of its releance well +efore (lo+aliation

+ecame a hotl! de+ated issue)

Arti(e and 8icolini 4,22>; anal!se the determinants of FDI 4forei(n direct

inestment; inflows for a (rou% of Euro%ean re(ions) 'he ori(inalit! of their a%%roach

lies in the use of disa((re(ated re(ional data) First# the! deelo% a =ualitatie

descri%tion of their data+ase and discuss the im%ortance of the macroeconomic

determinants in attractin( FDI) 'hen# the! %roide an econometric eercise to identif!

the %otential determinants of FDI) In s%ite of choosin( re(ions %resentin( economic

similarities# the! show that re(ional FDI inflows rel! on a com+ination of factors that

differs from one re(ion to another)

$nass!/ur# 9ou%et and "a!er 4,22; re/eamine the role of institutions in the

host and in the source countr! +! estimatin( a (rait! e=uation for +ilateral FDI

stocks that includes (oernance indicators for the two countries) Second# the! tackle

multicollinearit! and endo(eneit! +ias +! im%lementin( a three/sta(e %rocedure for

instrumentation and ortho(onalisation) 'hird# the! look further into the detail of

institutions +! usin( a new data+ase constructed +! the French "inistr! of Finance

network in >, forei(n countries) 'his data+ase is used to %oint out in some detail thereleant institutional features) Its countr! coera(e# which focuses on deelo%in(

countries# is er! hel%ful for stud!in( the im%act of the institutional enironment of

the host countr!) It does not allow# howeer# (oin( dee%l! into the im%act of the

institutional enironment in the source countr! as well as into the im%act of

institutional distance) ence the! com%lement our anal!sis with estimations +ased on

the Fraser data+ase# which %roides fewer details on institutions# al+eit on a more

+alanced countr! coera(e +etween industrial and deelo%in( countries) Finall!# the!stud! the im%act of institutional distance on +ilateral FDI)

Gn!eiwu and Shrestha 4,227; ar(ues that des%ite economic and institutional reform in

Africa durin( the %ast decade# the flow of Forei(n Direct Inestment 4FDI; to the

re(ion continues to +e disa%%ointin( and uneen) In their stud! the! use the fied and

random effects models to e%lore whether the st!lied determinants of FDI affect FDI

flows to Africa in conentional wa!s) $ased on a %anel dataset for ,0 African

countries oer the %eriod 10> to 1000# their %a%er identifies the followin(

factors assi(nificant for FDI flows to Africa: economic (rowth# inflation# o%enness of the


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econom!# international reseres# and natural resource aaila+ilit!) 9ontrar! to

conentional wisdom# %olitical ri(hts and infrastructures were found to +e

unim%ortant for FDI flows to Africa) 'he si(nificance of a aria+le for FDI flows to

Africa was found to +e de%endent on whether countr!/ and time/s%ecific effects are

fied or stochastic)

8akamura and G!ama 41003; studied the macroeconomic determinants of FDI from

Ha%an and the United States into East Asian countries# and the linka(e +etween FDI

and trade# and other macroeconomic aria+les) 'heir anal!sis focuses on the structural

differences amon( East Asian counties and classifies them +ased on statistical tests of

fied effects models usin( %anel data) 'his eamination hel%s to clarif! how Ha%anese

and American multinational firms %osition their %roduction +ases in East Asiancountries within their world marketin( strate(ies) In order to aoid the %ro+lem of

simultaneit! amon( aria+les# the! eamine simultaneous e=uation models to confirm

the alidit! of %anel re(ression results) In their stud! the! find that East Asian

countries can +e classified into four (rou%s de%endin( on FDI from Ha%an and other

elasticities to macroeconomic aria+les# and this (rou%in( almost coincides with their

economic deelo%ment sta(es) "oreoer# the! confirm that FDI from Ha%an into all

the (rou%s are stron(l! affected +! chan(es in real +ilateral echan(e rates# +ut this is

not alwa!s the case for FDI from the United States) Amon( different countr! (rou%s#

FDI into (rou% 1 4'aiwan and orea; res%onds %ositiel! to the Ha%anese ca%acit!

utiliation# indicatin( their industries? inte(ration with the Ha%anese econom!) @rou% -

4Indonesia and the Chili%%ines; shows that Ha%anese FDI is +uo!ed u% +! the !en?s

a%%reciation a(ainst the U)S) dollar) FDI into (rou% 7 49hina and "ala!sia; and# to a

lesser etent# (rou% , 4Sin(a%ore and 'hailand; is oriented more toward ca%turin(

local markets com%ared to the other (rou%s) 'he! also find that Ha%anese FDI has

stron( trade e%ansion effects# which is rarel! seen for U)S) FDI)

3. Methodology

'he theoretical work on the determinants of FDI and a discussion of arious factors

affectin( FDI has alread! +een %resented in the %reious stud!) In this stud! we

follow recent em%irical work# %articularl! Adeisu 4,22,;# to inesti(ate the

determinants of FDI for a sam%le African nations)


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ado%t the %reious work model in writin( a reduced form s%ecification of a demand

for inward direct inestment function with some amendments) It should +e %ointed

out that the selection of e%lanator! aria+les was constrained +! data aaila+ilit! - for

countries)

;#####4 it it it it it it it ,-./01 234D, )A40 /I50 10/ f FDI = (1)


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an indicator of the market %otential for the %roducts of forei(n inestors# the e%ected

si(n is %ositie) 9er capita 7D9 $a- also prox- for capital abundance

(!d"ards 0) and invest$ent cli$ate (8ei 20004 Aseidu 2002)

abour cost : La+or cost has alwa!s +een ar(ued to +e a major com%onent of total

%roduction cost and of the %roductiit! of firms)


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insi(nificant) 'a rates were made aaila+le from the "inistr! of Finance and

Economic Deelo%ment of the countr!)

-penness: It is a standard h!%othesis that o%enness %romotes FDI 4uf+auer et al)

1007;) In the literature# the ratio of trade to @DC is often used as a measure of

o%enness of a countr! and is also often inter%reted as a measure of trade restrictions)

'his %ro! is also im%ortant for forei(n direct inestors who are motiated +! the

e%ort market) Em%irical eidences 4Hun and Sin(h# 100.; eist to +ack u% the

h!%othesis that hi(her leels of e%orts lead to hi(her FDI inflows) 4see I9R@# 1000;)

The dependent variable FDI is $easured as the net foreign direct

invest$ent in>o" as a percentage of 7D9 and is a "idel- used

$easure (see Adeisu# ,22,* ?ua.i 2005; @oods%eed et al 200*) 'he

main sources of data series are from the International "onetar! Fund?s International

Financial Statistics 4IFS; 4arious issues;#


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A%%l!in( lo(s on +oth sides of the e=uation 1 4for ease of inter%retation; and

denotin( the lowercase aria+les as the natural lo( of the res%ectie u%%ercase

aria+le and t for time result in the econometric ersion:

it it it it it it it it it com pol ser +mgdpwage si;eres fdi ε β β β β β β β α ++++++++= .>7-,1

(2)

4. Analysis

In an attem%t to determine the determinants of FDI# in this stud! the %anel data

techni=ues has +een em%lo!ed) 'he use of %anel data techni=ues allows us to

determine the tem%oral eolution of (rou%s of countries rather than anal!in( the

tem%oral +ehaiour of each of them) 'his techni=ue takes into account the indiidual

hetero(eneit!# allows a lar(er num+er of data %oints and im%roes the efficienc! of

the estimates)

Canel data ma! hae (rou% effects# time effects# or +oth) 'hese effects are either fied

effect or random effect) A fied effect model assumes differences in interce%ts across

(rou%s or time %eriods# whereas a random effect model e%lores differences in error

ariances) 'he ausman s%ecification test com%ares the fied ersus random effects

under the null h!%othesis that the indiidual effects are uncorrelated with the other

re(ressors in the model 4ausman 103;) If correlated 42 is rejected;# a random

effect model %roduces +iased estimators# iolatin( one of the @auss/"arko

assum%tions* so a fied effect model is %referred) ausmanKs essential result is that the

coariance of an efficient estimator with its difference from an inefficient estimator is

ero 4@reene ,22-;)


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9onstant

1es

si;e

wage

+mgdp

pol

/er

'#.$

7'%.5# MMMsi(nificant at 15

'he small letters denotes aria+les in natural lo(arithmic and t alues are in %arentheses

All the explanator- variables as speci;ed in the econo$etric

functions are seen to be signi;cant ele$ents in attracting +D, in

Africa and are in line "ith recent e$pirical evidences +or instance

the a+undance of natural resources as measured +! 1/ is seen to +e %ositie and

si(nificant confirmin( the results of Aseidu 4,22,; for African case and inoshita and

9am%os 4,227;) 'his means the %resence of resource/seekin( FDI# thou(h the

elasticit! cannot +e readil! inter%reted since it is a =ualitatie aria+le)

G%enness had a %ositie im%act on FDI as well su((estin( that an efficient

enironment that comes with more o%enness to trade is likel! to attract forei(n firms

4this conclusion is also su%%orted +! Asiedu# ,22,* Edwards# 1002;# and that countries

that em+arked on trade li+eraliation were rewarded with more FDI) In fact# the

si(nificance of +mgdp een after controllin( for natural resource aaila+ilit! su((eststhat FDI is not onl! resource seekin( and that (oernment can %la! a major role as


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well in the FDI e=uation) FDI is +elieed to thus flow to non etractie industries

48on/natural resource +ased FDI; as well) 'his is %articularl! im%ortant to Africa

+ecause such inestments# for instance inestments in manufacturin( and

technolo(icall! intensie industries# enhance technolo(ical s%illoers and fosters

em%lo!ment)

'he sie of the domestic market# stock of human ca%ital# thou(h to a lar(e etent as

witnessed +! the sie of their res%ectie coefficients# %la!ed a %ositie role while

%olitical insta+ilit! and la+our cost a ne(atie role in attractin( FDI in the markets and

the results are consistent with em%irical works in the field)

Conclusions

'his research inesti(ated the factors enhancin( the attractieness of FDI reci%ient

countr! and is +ased on a sam%le of ,2 African countries oer the %eriod 1002/,22>)

'he a+undance of natural resources is re%orted to +e %ositie and si(nificant

4su%%ortin( the %resence of resource/seekin( FDI; and is line with Aseidu 4,22,; and

inoshita and 9am%os 4,227; works) G%enness had a %ositie im%act on FDI as well

and is in line with the fact that an efficient enironment that comes with more

o%enness to trade is likel! to attract forei(n firms) 'he sie of the domestic market#

stock of human ca%ital# thou(h to a lar(e etent as witnessed +! the sie of their

res%ectie coefficients# %la!ed a %ositie role while %olitical insta+ilit! and la+our

cost a ne(atie role in attractin( FDI in the markets and the results are consistent with

em%irical works in the field)

References

Asiedu E) 4,22,; NGn the Determinants of Forei(n Direct Inestment to Deelo%in(

9ountries: Is Africa DifferentOP


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Cheng 6 and "an B (2000) 8hat are the Deter$inants of the

6ocation of +oreign Direct ,nvest$ent The Chinese !xperienceE

Fournal of ,nternational !cono$ics51% G=H00

Dicke! DA# Fuller < A) 4100; NDistri+utions of the Estimators For Autore(ressie'ime Series with a Unit RootP Hournal of the American Statistical Association '

7,/3-1

7astanaga I Nugent F 9asha$iova J (3) :ost Countr-

o"s% :o" 'uch Di@erence Do The- 'a#eE

8orld Develop$ent 26(7) 2HG

@oods%eed '# "artine/Va=ue H# Qhan( L) 4,22.; NAre @oernment Colicies "ore

Im%ortant 'han 'aation in Attractin( FDI)P ISC 7)

wan( H# Sin(h ) 4100.; N'he Determinants of Forei(n Direct Inestment in

Deelo%in( 9ountriesP# 'ransnational 9or%orations & (2)# %%) ./12>)

e$sle- D (3) The !@ect of Taxes on 9roduction 6ocationE

Fournal of Accounting


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Chilli%s C 9 $# Cerron C) 41033; N'estin( for a Unit Root in 'ime Series Re(ressionP#

$iometrica ' %% -->/7.

uai R) 4,22>; Economic Freedom and Forei(n Direct Inestment in East Asia)

9olle(e of $usiness Crairie View A&" Uniersit! Crairie View# 'eas 77.# USA

International Academ! of $usiness and Cu+lic Administration Disci%lines 4IA$CAD;

meetin(s

Ralf and "old 4,22>;# N'he role of forei(n direct inestment 4FDI; in %riate sector

deelo%mentP in E9A Colic! Research Re%ort NUnleashin( the Criate Sector in

AfricaP# 4Draft ersion; ,22>

Rojid# S) 4,22>;# N'rade Catterns# Cerformance and Cotentials in 9G"ESAP# 'he

Em%irical Economics Letters# Volume 7# 8um+er .# 8oem+er ,22># C% -31 / -02

Rojid# S) 4,22.;# N9G"ESA 'rade Cotential: A @rait! A%%roachP# A%%lied

Economic Letters# ,22.#1-# C% 07/0>1)

Root FR# Ahmed A) 4100; NEm%irical Determinants of "anufacturin( Direct Forei(n

Inestment in Deelo%in( 9ountriesP Economic Deelo%ment and 9ultural 9han(e

2'# >1/.)

&caperlanda A 'auer 6 (*) The Deter$inants of U& Direct

,nvest$ent in the !!CE A$erican !cono$ic /77)

Seetanah and Rojid 4,22;# N'he determinants of FDI in "auritius: A d!namic time

series inesti(ationP# on(oin( %a%er)

Tsai 9 () Deter$inants of +oreign Direct ,nvest$ent and ,ts

,$pact on !cono$ic 7ro"thE Fournal of !cono$ic Develop$ent 19

G=H*G

8ei & (2000) :o" Taxing is Corruption on ,nternational ,nvestorsE


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**endi! 1:

igure 1: oreign +ire#t ,nvestment by region 1---2$$3

FDI (BoP current billion US$

0

100

200

300

400

500

600

700

North America East Asia &

Pacific

Europe &

Central Asia

European

Monetar !nion

Mi""le East &

North Africa

#outh Asia #u$%#aharan

Africa

1

2 000

2 001

2 002

2 003

Source: U89'AD 4,22.;

igure 2: oreign +ire#t ,nvestment by region 2$$&$


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Source: U89'AD 4,22;

africa fdi transportation

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