Macroeconomic and institutional conditions: the drivers behind divestment of FDI in Sub-Saharan Africa
| DOI | https://doi.org/10.1108/JCEFTS-03-2022-0016 |
| Published date | 11 July 2022 |
| Date | 11 July 2022 |
| Pages | 22-39 |
| Subject Matter | Economics,International economics |
| Author | Samson Edo,Obianuju Nnadozie |
Macroeconomic and institutional
conditions: the drivers behind
divestment of FDI in
Sub-Saharan Africa
Samson Edo and Obianuju Nnadozie
Department of Economics, University of Benin, Benin City, Nigeria
Abstract
Purpose –The purpose of this paper is to determine how macroeconomic performance work with
institutional quality influences divestment of foreign direct investment (FDI)in Sub-Saharan Africa, in the
short and long run.
Design/methodology/approach –This paper investigates divestment of FDI in Sub-Saharan Africa,
within the period 1980–2020. The investigation is undertaken by first comparing the trend with what is
obtained in other economic regions of the world. The factors behind the divestment are subsequently
investigated,using the vector error-correction model.
Findings –In the comparative analysis, Sub-Saharan Africa and other regions are observed to have
witnessed sustained divestment in recent years. The estimation results of the model reveal that
macroeconomicperformance and institutional quality are the predominantdrivers behind the divestment.
Research limitations/implications –The findings, however,do not conform to the neoclassical theory
that lays emphasis on investment return as the fundamental factor influencing investment. Long-run
structural stability is also established; hence, the results may be considered suitable for predicting future
divestmentin the region.
Practical implications –In view of the empirical findings,macroeconomic performance and institutional
qualityneed to be improved to ameliorate FDI divestmentin Sub-Saharan Africa.
Originality/value –There is paucity of research works on divestment of FDI in Sub-Saharan Africa.
Again, there is paucity of works on how macroeconomic and institutional conditions work together to
influencedivestment. This study provides some evidence to bridgethe perceived gaps.
Keywords Macroeconomic performance, Institutional quality, Foreign divestment,
Developing countries
Paper type Research paper
1. Introduction
The neoclassical theory posits that return on investment is the fundamental factor
influencing capital flows across countries (Bovenberg and Goulder, 1993). It argues that
return is relatively high in countries with low level of capital perworker; hence, investment
tends to move toward poorer countries. Apart from the neoclassical theory, other theories
have highlighted more factors influencing capital flows. In particular, the post-Keynesian
JEL classification –O20, D73, F21, O55
Ethical compliance.
Funding: In the absence of research grant, this study was funded from private savings of the
authors.
Conflict of interest: No conflict of interest in this work. It is the original work of the authors.
JCEFTS
16,1
22
Journalof Chinese Economic and
ForeignTrade Studies
Vol.16 No. 1, 2023
pp. 22-39
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-03-2022-0016
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1754-4408.htm
monetary theory considers investors’attitude toward risk as the fundamental determinant
of capital flows in a risky global economy (Bonizzi, 2013). The international financial
institutions, therefore, adopt the multi-factor approach in analyzing capital flows across the
world (IMF, 2012). Following the neoclassical proposition, Sub-Saharan Africa (SSA) with
relatively low capital perworker is expected to attract more foreign direct investment (FDI),
to catch up with other regions of the world. However, there is high investment risk in SSA
that tends to militate against capital flows; hence, the inflow of FDI has not been
encouraging, and evencharacterized by sustained divestment in recent years (Osabuteyand
Okoro, 2015;Islamaj and Kose, 2021). The levelof FDI in the region has, therefore, remained
relatively low since 1980, whichmay take a long period of time to catch up with the levels in
other developing regions of Asia and South America. In the 1960s and 1970s, FDI in SSA
was quite appreciable, but dropped drastically in the period 1980–2020, due to political,
social and economic challenges. Other economic regions of the world also faced similar
problem, but some of them have taken concrete policy measures to discourage divestment.
The Asian countries, for instance, have substantially improved the quality of economic
environment and institutions,and consequently reduced the spate of divestment. In SSA, the
case is quite different, as the state of macroeconomic environment and institutions has
remained a major challenge to foreign investment, except in some countries that have
undertaken fundamentalpolitical and economic reforms (Sievers, 2001).
The macroeconomic performance of SSA was also quite impressive in the 1960s and
1970s, with average economicgrowth rate exceeding other developing regions of the world,
as a result of boom in primary commodity exports and foreign aid (UNCTAD, 2001). The
economic performance deterioratedrapidly in the 1980s and 1990s, unlike other regions that
experienced moderate decline. The long-term growth of SSA since 1980 has, therefore, been
generally low, compared to other developing regions of the world, such as Latin America
and Caribbean (LAC), South East Asia (SEA), Middle East and North Africa (MENA), etc.
The growth rate of SSA has been highly unstable due to external shocks and political
disturbances. To improve the poor economic performance, the World Bank (2021)
recommended that SSA needs to reduce debt burden, which would release resources for
public investment in education, health and infrastructure. SSA is also saddled with the
problem of low institutional quality, which encourages high cost of doing business. The
region operates formal institutions adopted from other climes, and informal institutions
rooted in the culture and traditional values of the indigenous society. The co-existence of
these institutions presents a conflict situation that tends to create additional transaction
costs for business enterprises. Both institutions are also characterized by corruption that
further escalatestransaction costs, thus constituting a major challengeto foreign investment
(Donaubauer, 2022).
However, the extent to which macroeconomic performance and quality of institutions
affect foreign divestmentin SSA has yet to be given adequate attention by researchers.This
study, therefore, attempts to investigate the issue, with the prime motive of ascertaining
how macroeconomic performance works with institutional quality to influence divestment
of FDI. The investigation also includes other relevant factors that influence the process of
divestment, to avoid the problem of under-specifying a model and generating spurious
estimates. The vectorerror-correction model (VECM) is used in determining short-and long-
run effects of the factors. The study covers a panel of 46 Sub-Saharan African countries
listed in Appendix 1 and the period 1980–2020. The selection of countries is based on
availability of data and similarityin pattern of FDI flows. The entire study is structured into
seven sections comprising introduction, literature review, descriptive analysis of FDI
Divestment of
FDI
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