Impact analysis of institutional quality on foreign direct investment inflows into the Southern African Development Community (SADC) region
Date
2022
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Witwatersrand, Johannesburg
Abstract
The quality of governance has increasingly become a significant determinant of foreign direct investment inflows in recipient countries. Although extensive research has been conducted internationally to examine the role of institutional quality on foreign direct investment inflows, this concept has not been thoroughly interrogated in the Southern African Development Community (SADC) context. The region is poverty-stricken, unemployment rates are skyrocketing, economic
growth is deteriorating, and the region only accounts for only one percent of global FDI. Thus, this study sought to examine three main objectives critically: first, the effect of institutional quality on foreign direct investment inflows into the SADC region; second, the influence of the financial development on the FDI-institutional quality nexus and thirdly, to assess whether countries’ income levels matter for attracting FDI inflows.
FDI as a percentage of GDP was measured as a dependent variable, while institutional quality, financial development, natural resource availability, and GDP growth were the main explanatory variables. The study controlled for inflation rates, trade openness, and trade policy. An interaction term was generated to evaluate the effect of financial development on the FDI-institutional quality nexus in the SADC region.
In order to achieve the research objectives, a mixed-methods approach was adopted, and a convergence research design was applied. Secondary data for other macroeconomic variables were drawn from the World Bank Development Indicators. In contrast, data for financial development were drawn from the International Monetary Fund’s Financial Development Index database, and data for governance indicators were drawn from the Worldwide Governance Indicators’ database. Primary data was collected through semi-structured interviews and survey questionnaires.
Econometric models were developed to analyse panel data from 2011 – 2018 for 15 SADC member states to achieve the set objectives quantitatively. Specifically, the study adopted the Generalised System Methods of Moments (GMM) as the appropriate and efficient estimation technique for the analysis. Using a Pillar Integration Process, the data were integrated. The overall findings suggested that, while GDP growth, trade openness, and natural resources positively influence FDI inflows into the region and are statistically significant, institutional quality, inflation, trade policy and financial development are negatively and statistically significant coefficients towards FDI. The results revealed that a poor regulatory environment, the rule of law, and weak accountability are the main disincentives
to improved quality of governance.
The overall results indicated that weak institutional quality is still a significant challenge as far as inward FDI attraction is concerned; the lack of an enforcement mechanism directly impacts foreign investor property rights protection and eventually deters foreign investment inflows. Also, the unstable political framework that fails to sufficiently support economic institutions and ensure certainty, and the lack of political will, particularly by heads of government to implement and prioritize regional objectives over national interests, is a significant problem and stifles progress towards more profound integration. It also transpired that the financial markets and institutions within the region are not efficiently developed and are still fragmented, and this is attributed to macroeconomic instability and
weak macroeconomic convergence. The findings also revealed that the countries’ income levels do not matter as far as FDI attraction is concerned.
Based on these results, it may be necessary for SADC member states to adopt an institutional framework that promotes collaboration in the region and ensures effective and efficient implementation of the potential protocols. Given the dominance of national sovereignty over regional objectives, it may be worth examining the regimes that govern the member states; based on the view that sometimes non-compliance by member states emanates from the regime, which may sometimes not support regionalism. Convergent bilateral and multilateral arrangements are necessary for the region. The region needs to raise its export competitiveness by attracting domestic and foreign investments, and a rigorous trade integration process is a prerequisite. Policymakers in the region should focus on working together with institutions to promote development in the banking sector. Further, given the adverse effects of financial development on FDI inflows due to rising domestic credit by the banking sector, efforts should be made to maintain domestic credit levels to allow room for more FD
Description
Thesis Submitted in fulfillment of the Requirements of for the Degree of Doctor of Philosophy University of the Witwatersrand, Johannesburg 2022
Keywords
FDI, Institutional quality, SADC, Macroeconomic convergence, Regionalism, Governance, GMM, UCTD
Citation
Malindini, Kholiswa . (2022). The role of design houses [PhD thesis, University of the Witwatersrand, Johannesburg]. WireDSpace.https://hdl.handle.net/10539/40951