Ease of Doing Business and Foreign Direct Investment: Case of Sub-Saharan Africa
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Ease of Doing Business and Foreign Direct Investment: Case of Sub-Saharan Africa Edward Nketiah-Amponsah 1
& Bernard
Sarpong 1
# International Atlantic Economic Society 2020
Abstract This paper investigates the empirical relationship between selected ease-ofdoing-business indicators and foreign direct investment in sub-Saharan Africa. Using a panel of 45 sub-Saharan African countries covering the period 2004–2018 and the system generalized method of moments estimation technique, the paper reveals that ease-of-doing-business indicators play a significant role in attracting foreign direct investment to the sub-region. Specifically, a percentage point improvement in the ease of starting a business in sub-Saharan Africa results in a 0.79 percentage point increase in foreign direct investment. Moreover, a percentage point improvement in tax administration, coupled with the existence of an optimal tax rate, increases foreign direct investment inflows by 0.17 percentage point. This paper contributes to the empirical literature by proposing a new model that incorporates the quantitative effects of easeof-doing-business indicators on foreign direct investment. These findings underscore the need for policymakers to operationalize business friendly policies that permit and promote private sector development in order to attract multinational corporations. Keywords Foreign direct investment . Ease of doing business . Policy reforms . SubSaharan Africa . System GMM JEL F01 . F30 . O10
Introduction Foreign direct investment (FDI) is crucial to the development discourse of developing and transition economies. This is premised on the fact that FDI leads to transfer of financial capital, expertise and new technologies to help undertake various projects for economic development in emerging economies (Ho & Rashid, 2011). The literature
* Edward Nketiah-Amponsah [email protected]
1
Department of Economics, University of Ghana, Legon, Accra, Ghana
Nketiah-Amponsah E., Sarpong B.
explains that locational FDI is influenced by four main motives: resource-seeking, market-seeking, efficiency-seeking and strategic-asset-seeking. However, these motives vary from one World Bank region to the other. Nunnenkamp (2002) argued that FDI movement to developed economies are increasingly grounded in cost savings rather than the usual quest for larger markets for produced goods. This represents a gradual shift from resource and market-seeking projects to efficiency-seeking investments in advanced economies. Using firm-level Japanese FDI data on investment in 18 European countries between 1970 and 2000 in all industries, Von Der Ruhr and Ryan (2005) found that, consequent to the liberalization of financial markets, inflows of banking FDI have been greatly attracted to developed economies which served as a strong pull factor for non-banking FDI; a phenomenon attributable to the huge market potential. Meanwhile, in developing countries, movement of FDI is predominantly based on resource and market-seeking motives. The United Nations Conferenc
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