Foreign aid and foreign direct investment in Sub-Sahara Africa: A panel data analysis

25 October 2016
Publication Type: Policy Brief
JEL Code: F21, F35

This study examines the relationship between foreign aid and foreign direct investment (FDI) in 31 sub-Saharan African (SSA) countries between 1995 and 2012. Significant resource constraints have meant increased reliance on external sources of funding such as foreign direct investment and foreign aid (ODA) for many sub-Saharan African countries. FDI is considered to be a more stable financial flow compared to foreign aid, and the means of attracting increased FDI flows to the region remain a topical issue in development studies. Research focus has also beamed staidly on the linkages between FDI and foreign aid in the foreign aid discourse. This is especially significant because the continued sluggishness of FDI inflows coupled with volatility in aid flows means that SSA faces increasing pressures to access innovative means of generating crucial resources for development.  The study sought to answer three specific questions; first, does foreign aid enhance FDI inflows into SSA countries? Second, is the nexus between foreign aid and FDI uniform across oil endowed and non-oil endowed SSA countries? Lastly, is sectoral analysis important in the examination of the effectiveness of foreign aid? Using panel data estimation techniques, the results suggest that productive infrastructure aid is complementary to FDI inflows and socio-economic infrastructure aid has no significant impact on FDI inflows. When resource (oil) motive of FDI is considered, the results indicate that productive and socio-economic infrastructure aid to oil-producing SSA countries results in less FDI inflows compared to non-oil producing SSA countries. Finally, findings from the sectoral aid analysis highlight the complementary role of energy infrastructure aid and an insignificant impact of transport infrastructure aid on FDI inflows respectively.

Series title: Research Brief 89
1 October 2016
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