Profiling Sectoral Risks of Foreign Direct Investment in Africa

Working Paper 415
Author(s): 
Henri Bezuidenhout, Zahné Coetzee and Carike Claassen
Publication date: 
January, 2014
Journal: 
Journal of Economic and Financial Sciences
Classification-JEL: 

Despite Africa’s exceptional FDI performance during the past decade, the majority of FDI inflows have been directed to a few selected countries. As investors face many risks when investing in developing countries, it is argued that risk perception plays a vital role in the FDI inflows into Africa. This article focuses on the relationship between risk and FDI. A structural equation model is used to analyse this relationship with a dataset of ten risk categories and FDI data from 42 African countries. The study focuses on four sectors, namely metals, automotive, communications and real estate. Overall, results indicate that government effectiveness and legal and regulatory risks produce the biggest concern for investors. The conclusion is that each sector has different risk patterns regarding FDI. The empirical results imply that if African countries need to focus on government effectiveness, stability and transparency to attract the levels of FDI required to stimulate economic growth.

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