FEATURE ARTICLE 1

Foreign Direct
Investment and
Economic Growth
in SSA: The Role
of Institutions
By
Elikplimi Komla Agbloyor
Agyapomaa Gyeke-Dako
Ransome Kuipo
Joshua Yindenaba Abor

This article examines the relationship among foreign direct investment (FDI), institutions and economic
growth in sub-Saharan Africa in different country environs. We employ a two-step generalized methods
of moments estimator with Weidmeijer corrected standard errors and orthogonal deviations to examine
the empirical relations. In the full sample, we do not find evidence that FDI promotes growth. We also
do not find a significant relationship between institutions and economic growth. Finally, we do not find
convincing evidence that institutions alter favorably the effect of FDI on economic growth. In the sub-
sample that excludes countries with developed financial markets, again we do not find a significant
relation between FDI and economic growth. However, we find evidence suggesting that institutions
play a direct role in spurring economic growth. Further, the quality of institutions seems to alter favor-
ably the relationship between FDI and economic growth. Finally, in the sample that excludes countries
with abundant natural resources, we find a direct and positive relationship between FDI and economic

Correspondence to: Elikplimi Komla Agbloyor, Department of Finance, University of Ghana Business School, P.O. BOX LG 78, Legon, +233244973939 (phone),
0302–500024 (fax), ekagbloyor@ug.edu.gh

Published online in Wiley Online Library (wileyonlinelibrary.com)

© 2016 Wiley Periodicals, Inc. • DOI: 10.1002/tie.21791
2 FEATURE ARTICLE
growth. We also find a direct relationship between institutions and economic growth. The growth-
enhancing effects of FDI, however, seem to reduce as the quality of institutions improves. The major
implication from our study is that countries should take into consideration their own realities when
they fashion policies to benefit from FDI in terms of achieving better growth outcomes. © 2016 Wiley
Periodicals, Inc.
Introduction
E
conomic theory suggests that foreign capital flows
should promote economic growth because they
contribute to a host country’s capital accumula-
tion, introduce new technologies, and improve manage-
ment techniques and productivity spillovers (see OECD,
2002). Despite these strong theoretical prescriptions (see,
e.g., Romer, 1993), the empirics on both the micro and
macro fronts have produced largely mixed and inconclu-
sive results. Indeed, the empirical evidence most often
does not show a positive relation among FDI, productivity
spillovers, and economic growth. Although some studies
have shown a negative relationship, others have found
an insignificant relationship between private capital flows
and economic growth/productivity spillovers (Aitken
& Harrison, 1999; Carkovic & Levine, 2002; Djankov &
Hoekman, 2000; Konings, 2001). Recent thinking sug-
gests that these results may be attributable to the peculiar
characteristics of host economies. It is becoming increas-
ingly evident that private capital flows promote growth
only under certain conditions. These conditions include
human capital development, trade openness, macroeco-
nomic stability, infrastructural development, institutions,
financial development, and good governance.
Previous studies have shown that the quality of
human capital (Borensztein, De Gregorio, & Lee, 1998;
Li & Liu, 2004), trade openness (Balasubramanyam, Sal-
isu, & Sapsford, 1996), macroeconomic stability (Algua-
cil, Cuadros, & Orts, 2011), good infrastructure (Li &
Liu, 2004; World Bank, 2001), institutions (Azman-Saini,
Baharumshah, & Law, 2010), and financial development
(Adjasi, Abor, Osei, & Nyavor-Foli, 2012; Agbloyor, Abor,
Adjasi, & Yawson, 2014; Alfaro, Areendam, Kalemli-
Ozcan, & Sayek, 2004; Durham, 2004; Hermes & Linsenk,
2003; Omran & Bolbol, 2003) are necessary for host
countries to benefit from foreign private capital flows.
In the absence of these conditions, developing countries
may not achieve the full benefits of foreign capital flows
in terms of higher growth outcomes and may be more
prone to economic/financial crises. This indicates that
the extent to which FDI can be beneficial depends on the
country’s absorptive capacity.
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This article builds on and is related to three strands
of the extant literature that examine (1) the impact of
capital flows on economic outcomes, (2) the effect of
institutions on economic outcomes, and (3) the con-
ditions under which foreign capital flows are growth-
enhancing. We focus mainly on extending the frontiers
of knowledge on the third strand. Vibrant institutions
in a country are formulated to promote fairness and
the equitable distribution of resources. Institutions form
the incentive structure of a society, and, consequently, the
political and economic institutions are the underlying
determinants of economic performance (North, 1990).
Acemoglu, Johnson, Robinson, and Thaichareon (2003)
qualify countries as possessing strong institutions if they
are democratic, have relative equality, suffer few radical
social cleavages, and have a variety of checks and balances
on political behavior. Recent empirical studies have docu-
mented that countries with stronger institutions tend
to attract higher foreign capital flows (Alfaro, Kalemli-
Ozcan, & Volosovych, 2008; Buchanan, Le, & Rishi, 2012;
Lothian, 2006; Papaioannou, 2009; Wei, 2000).
On another level, the quality of a country’s institu-
tions has been shown to matter for its growth outcome
(see Acemoglu et  al., 2003; Acemoglu & Robinson,
2000; Azman-Saini et al., 2010; Efendic, Pugh, & Adnett,
2011).
The interaction between institutions and foreign
capital flows may jointly determine whether a country
benefits from foreign capital flows (see Alguacil et  al.,
2011); Azman-Saini et al., 2010; Bengoa & Sanchez-
Robles, 2003). The following papers are the most relevant
to this study. Bengoa and Sanchez-Robles (2003) examine
the relationship among FDI, economic freedom, and
economic growth in Latin America. They find that both
FDI and economic freedom positively contribute to the
process of economic growth. Azman-Saini et  al. (2010)
examine whether the impact of FDI on economic growth
differs based on the level of economic freedom. Their
findings indicate that the impact of FDI on growth is
contingent on the level of economic freedom. Alguacil
et al. (2011) also examine the impact of FDI on economic
growth, considering the role of institutions and the mac-
roeconomic environment. Their findings indicate that
DOI: 10.1002/tie
 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions
FDI spurs economic growth in low-income and lower-
middle-income countries.
An important gap that has not been addressed by
the extant literature is the role of good institutions in
the FDI-growth nexus in different environments. This
missing link may explain why some countries have not
achieved the full benefits of FDI. Though the literature
has moved forward to examine how absorptive capacities
affect a country’s ability to benefit from FDI, the absorp-
tive capacities have been examined in isolation. The
effect of FDI on growth depends on how these absorp-
tive capacities interact with each other. For example,
how does FDI interact with institutions in high- and low-
resource environments? Further, how does FDI interact
with institutions in countries with high and low financial
development? These types of questions remain largely
unresolved in the extant literature. Consequently, we test
the hypothesis that the effect of FDI and institutions on
growth varies based on the level of financial development
and natural resource endowment.
The rest of this article is structured as follows: the
second section presents stylized facts on the evolution of
institutions in sub-Saharan Africa (SSA); the third section
examines the literature on institutions, private capital
flows, and economic growth; the fourth section details
the methodology employed; the fifth section presents and
discusses the results from the empirical estimations; and,
finally, the sixth section concludes and provides policy
implications.
FIGURE 1 Institutional Quality in SSA
Source: Authors’ own computation. Data were obtained from the Worldwide Governance Indicators provided by the World Bank.
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3
Stylized Facts on Institutions in SSA
SSA seems to have a bad image in regard to the quality
of its institutions. This has, in part, been fed by negative
reporting concerning the African continent and the vari-
ous wars that have ravaged this resource-rich continent.
Notwithstanding this image, over the past three decades,
many African countries have made strenuous efforts to
reform and improve the quality of their institutions. In
this section, we assess the evolution of institutions across
SSA. We also attempt to identify the countries with the
best institutions as well as those with the worst institutions.
Finally, we compare the quality of institutions in SSA to
six other regions in the world. We use the Kaufmann,
Kraay, and Mastruzzi (2010) indicators of governance
as our proxy for institutions. These six indicators are
sourced from the World Governance Indicators provided
by the World Bank: control of corruption, government
effectiveness, rule of law, political stability and absence of
violence, regulatory quality, and voice and accountability.
Figure 1 shows how the various indicators have
changed in SSA over the period 1996–2011. The figure
suggests that political stability across SSA has improved
over this period. Voice and accountability also shows an
upward trend, which suggests that media freedom, free-
dom of association, freedom of expression, and the abil-
ity of citizens to elect their governments have improved.
Democracy is more entrenched in Africa now, given
that many more governments are elected, even though
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4 FEATURE ARTICLE
pockets of political instability and violence still exist. The
ability of governments to offer quality public services and
to formulate and implement policies that are indicators
of government effectiveness, seems to have declined over
the period. Regulatory quality, the rule of law, and con-
trol of corruption, although not following a clear pattern,
improved, then declined, and achieved some recovery by
the end of 2011. By the end of 2011, regulatory quality
and the rule of law showed gains compared to their start-
ing values, whereas control of corruption was similar to
levels seen in 1996. Overall, Figure 1 suggests that these
governance indicators have not significantly changed
over the period considered.
Appendix 1 shows the top ten countries with the best
and worst institutions in SSA for the various institutional
indicators. We can clearly identify the countries with the
FIGURE 2 Institutional Quality around the World
Source: Authors’ own computation. Data were obtained from the Worldwide Governance Indicators provided by the World Bank. EAP = East Asia and Pacific;
ECA = Europe and Central Asia; LAC = Latin America and Caribbean; MENA = Middle East and North Africa; SSA = sub-Saharan Africa; NA = North America;
SA = South Asia.
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best and worst institutions because most countries fall in
more than one of the six categories at a time. Appendix 1
shows that the countries with the best institutions in Africa
include Benin, Botswana, Cape Verde, Ghana, Lesotho,
Mauritius, Namibia, Sao Tome and Principe, Senegal,
Seychelles, South Africa, and the Gambia. Countries that
suffer from chronic institutional setbacks include Angola,
Burundi, Central African Republic, Chad, Comoros,
Congo, Democratic Republic, Equatorial Guinea, Eritrea,
Guinea, Guinea-Bissau, Liberia, Nigeria, Somalia, South
Sudan, Sudan, and Zimbabwe.
Figure 2 portrays the six dimensions of institutions
across various regions around the world. The figure sug-
gests that North America (NA), followed by Europe and
Central Asia (ECA), seem to have the best institutions
for almost all of the indicators. SSA and the Middle East
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 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions
and North Africa (MENA), conversely, appear to have
the worst institutions. SSA ranks the lowest in regulatory
quality, rule of law, control of corruption, and govern-
ment effectiveness. The South Asia (SA) region appears
to be the least stable politically and more prone to violent
upheavals, with the SSA region closely situated as the
second least stable. In MENA, freedom of expression,
freedom of association, media freedoms, and the abil-
ity of the citizenry to elect their governments are highly
curtailed. After MENA, SSA ranks the lowest in terms of
political stability and the absence of violence.
Literature Review
In this section, we review the literature on FDI, institu-
tions, and economic growth.
FDI and Institutions
Papaioannou (2009) studies the impact of institutions on
cross-border bank lending in a large sample of countries
using both cross-sectional and panel data techniques.
They show that institutional improvements are followed
by significant increases in international finance. Lothian
(2006) finds that countries with better institutions, as
proxied by the Economic Freedom of the World Index,
tend to receive higher foreign investment. They therefore
conclude that institutions are the driving force behind
the puzzling paradox in which capital does not flow from
rich to poor countries. Aizenman and Spiegel (2006)
show that institutional efficiency, such as the strength of
property rights, is robustly correlated with the ratio of
FDI to total domestic investment. Supporting previous
studies, Wei (2000) shows that corruption hinders FDI
flows. Busse and Hefeker (2007) cover a sample of 83
developing countries from 1984 to 2003 and find that
government stability, internal and external conflict, cor-
ruption and ethnic tensions, law and order, democratic
accountability of government and quality of bureaucracy
significantly influence the activities of multinational
enterprises.
Asiedu (2006) finds that countries that have an
effective rule of law attract more FDI flows. They also
find that corruption and political instability hinder FDI
flows to SSA. Ibrahim, Elhiraika, Hamdok, and Kedir
(2005) also use an African data set and find that most of
their political and institutional risk indicators are insig-
nificant in explaining FDI flows in Africa. Cleeve (2012)
finds that countries with democratic systems, good
socioeconomic conditions, and strong investment pro-
files tend to attract larger proportions of FDI. Further,
they find that corruption and government instability do
DOI: 10.1002/tie
5
not seem to have any effect on the inflow of FDI. Distin-
guishing between resource-exporting and non-resource-
exporting countries, Asiedu and Lien (2011) find that
foreign investors prefer democratic governments when
they operate in non-resource-exporting countries but
prefer less democratic or nondemocratic governments
when they operate in resource-exporting countries.
They further find that natural resources, whether made
up of oil or minerals, undermine the positive effect of
democracy on FDI.
Bissoon (2012) uses data for 45 developing countries
in the African, Latin American, and Asian regions and
finds that the quality of institutions matters for inward
FDI in host countries. Ledyaeva, Karhunen, and Kosonen
(2013) use firm-level panel data from 1996 to 2007 for
various regions in Russia and finds that investors from
more corrupt and less democratic countries tend to invest
in more corrupt and less democratic Russian regions,
thus suggesting commonalities between foreign investors
and host regions. Using a cross-sectional data set, Anghel
(2005) finds that different aspects of a country’s institu-
tions, such as corruption, protection of property rights,
and policies related to opening and maintaining a busi-
ness, significantly affect its receipt of FDI flows. Alfaro
et al. (2008) discover that institutional quality is the lead-
ing explanation for the Lucas Paradox (see Lucas, 1990).
Aleksynska and Havrylchyk (2013) analyze the location
choices of investors from emerging economies and find
that large institutional distance discourages FDI inflows
but that this deterring effect is diminished for destination
countries with substantial resources.
Buchanan et  al. (2012) investigate the institutional
antecedents of FDI volatility. They find that institutional
quality has a positive and significant effect on FDI,
whereby a one-standard-deviation change in institutional
quality changes FDI by a factor of 1.69. Further, they show
that institutional quality has a negative and significant
effect on the volatility of FDI. Therefore, Buchanan et al.
(2012) confirm that institutions promote FDI flows while
identifying a new realization that institutions reduce
the volatility of FDI flows. Okada (2013) suggests that
financial openness alone may not be sufficient to attract
foreign investments. Indeed, they show that the effect of
financial globalization on international capital inflows
depends on a country’s institutional quality. They find
that although financial openness and institutional quality
do not individually have a significant impact on interna-
tional capital inflows, their interaction effects are found
to be significant. Therefore, countries with stronger insti-
tutions seem to benefit more from financial openness
and globalization.
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6 FEATURE ARTICLE
Institutions and Economic Growth
Aisen and Veiga (2013) use a System-GMM estimator for
169 countries with five-year period averages for 1960 to
2004 and find that higher degrees of political instability
are associated with lower growth rates of gross domestic
product (GDP) per capita. Political instability is found
to impact economic growth by lowering the rate of
productivity growth and, to a lesser degree, human and
physical capital accumulation. Efendic et  al. (2011) use
meta-regression analysis and find robust evidence that
institutions exert a large and positive influence on output
levels. They argue that studies that focus on output levels,
which often use an extended production function speci-
fication and address the potential endogeneity of institu-
tions, tend to provide the most valid estimates. Compton,
Giedeman, and Hoover (2011) use state-level data for the
United States and show that economic freedom at the
state level promotes economic growth.
Do Institutions Moderate the Effect of FDI
on Economic Growth?
Alguacil et  al. (2011) examine whether countries with
better institutional and macroeconomic environments
exploit FDI more efficiently or whether the presence of
these local conditions provides the channels responsible
for growth. The macroeconomic environment is proxied
using inflation and the external debt-to-export ratio,
whereas the quality of a country’s institutions is proxied
by the Fraser Institute’s Economic Freedom of the World
Index. Alguacil et al. (2011) show that it is important to
control for the macroeconomic and institutional environ-
ments when studying the link between FDI and economic
growth in emerging market economies. They find that
the positive effect of FDI on growth persists for low-
income countries but not for more developed ones. Kose,
Prasad, and Taylor (2011) show that there are clearly
identifiable thresholds in the indicators of financial
depth and institutional quality in the process of financial
integration. They indicate that the cost-benefit trade-off
from financial openness improves significantly once these
threshold conditions are satisfied. Further, they find that
the threshold for equity-related flows (FDI and portfolio
investments) is lower than that of debt flows.
Azman-Saini et  al. (2010) indicate that FDI has no
direct impact on growth but that the effect of FDI on
growth is contingent on the level of economic freedom in
host countries. When they unbundle the aggregate eco-
nomic freedom index, they find that the legal system and
protection of property rights; the freedom to trade inter-
nationally; and regulations governing credit, labor and
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business are most important in capturing the beneficial
effects of FDI. Bengoa and Sanchez-Robles (2003) find
that both FDI and economic freedom in Latin American
countries enter their empirical modelling as both positive
and significant. This suggests some direct role of FDI in
impacting economic growth in Latin America. They also
find that economic freedom promotes FDI to Latin Amer-
ican countries. Quite apart from FDI, some studies have
found that the institutional environment matters for port-
folio investments. Durham (2004) finds that the positive
effect of foreign portfolio investment (FPI) on growth is
contingent on financial development and legal variables
or comparative institutions. In particular, they find that
FPI inhibits growth in countries with comparatively small
equity markets and pervasive corruption.
Empirical Method and Strategy
We estimate a dynamic panel data growth model using
data averaged over three nonoverlapping years from
the period 1996–2010. Though five-year averages are
more common in the literature, we opt for a three-year
average to provide us with more data points. Thus, data
permitting, we have five time periods (i.e., 1996–1998;
1999–2001; 2002–2004; 2005–2007, and 2008–2010).
Panel data techniques augment the variability of the data
and allow us to gain more degrees of freedom. It includes
a time variation (within-country standard deviation) and
the country variation (between-country standard devia-
tion). We average the data because we are interested in
long-term growth and ironing out business cycle effects.
Our model is similar to previous studies employed in
this area of investigation (see Alfaro et  al., 2004; Adjasi
et al., 2012; Durham, 2004). The model estimated is given
as follows:
yit = β1yit –1 + β2 FDIit + β3Institutionsit
+ β4(FDI * Institutionsit) + ΣNj=5 βj Xit –1 + εit (1)
where yit represents the log of the three year averaged
GDP per capita data in 2000 constant dollars for coun-
try i, subscript t represents time, yit −1 represents the first
lag of yit, and β1 represents the coefficient of the lag of
GDP per capita. We obtained the GDP per capita data
from the World Development Indicators. β2 represents
the coefficient of FDI. FDI is measured as the ratio of
FDI to GDP. The data on FDI were obtained from the
World Development Indicators. β3 represents the coef-
ficients of the institutional indicators. The data on
institutions were obtained from the World Governance
Indicators. Following Kose et  al. (2011), we average the
DOI: 10.1002/tie
 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions
six Kaufmann indicators to obtain an aggregate measure
for institutional quality. Additionally, we include the six
individual components sequentially in the regressions.
Therefore, for each sample, we have seven different
regressions. β4 represents the interactive effect between
FDI and the institutional indicators.
FDI and institutional indicators are included in the
model to capture their independent effects on growth.
We include the product of FDI and the institutional
indicators to capture the interactive effect between FDI
and institutions. However, unlike previous studies, we
examine how this relationship varies in different environs
by considering the levels of financial development and
natural resource endowment. The list for these countries
are presented in Appendix 3 and 4 respectively. Financial
development is measured as financial depth (M2/GDP),
and natural resource endowment is measured as natural
resource rents as a ratio of GDP. The definition of natural
resource rents encompasses oil rents, natural gas rents,
coal rents, mineral rents, and forest rents. To achieve our
objective, we drop countries in which financial develop-
ment and natural resource endowment lie above their
mean indicators. We then rerun the regression using
Model 1, presented above. This allows us to obtain esti-
mates both with and without these countries to examine
whether there are any dynamic changes. Further, this
helps us remove outliers from the sample.
Xit is a set of control variables. We include a set of
information conditioning to ensure that we are captur-
ing the effect of the institutional and FDI indicators on
economic growth. These control variables have been
widely used in the growth literature and include the level
of trade openness, savings, and human development
(see Sala-i-Martin, 1997). We expect a positive relation
between trade openness and economic growth. Trade
openness is measured as the sum of imports and exports,
all of which are scaled by GDP. Trade liberalization is
usually undertaken to open up a country and to promote
economic growth. Yanikkaya (2003) finds that trade
openness promotes economic growth, although trade
barriers also appear to have a positive and significant rela-
tion with growth. Falvey, Foster, and Greenaway (2012)
find that trade liberalization raises economic growth in
both crisis and noncrisis periods.
We hypothesize a positive relationship between sav-
ings and economic growth. Savings is measured as gross
domestic savings to GDP. Traditional growth theories
predict a positive relationship between savings and eco-
nomic growth. In Africa, Agbloyor et  al. (2014) find
a positive relationship between savings and economic
growth. We also expect a positive relationship between
DOI: 10.1002/tie
7
human development and economic growth. We proxy
human development with the Human Development
Index (HDI). Human development measures the average
achievements in a country across three basic dimensions
of human development: a long and healthy life, access to
knowledge, and a decent standard of living. For example,
Benhabib and Spiegel (1994) and Ranis, Stewart, and
Ramirez (2000) find a positive and significant relation-
ship between human development and economic growth.
εit represents the error term in the regression. The error
term breaks down into μi +  vit. μi represents the time
invariant country-specific effect, and vit represents the
remainder of the disturbance in the estimated regres-
sions. The list of countries employed in the empirical
analysis is provided in Appendix 2.
Estimation Technique
We estimate the empirical relations via a system general-
ized method of moments (SGMM) estimator. The GMM
class of estimators was developed by Holtz-Eakin, Newey,
and Rosen (1990), Arellano and Bond (1991), Arellano
and Bover (1995), and Blundell and Bond (1998). There
are two main types of estimators: the difference GMM
estimator and the SGMM estimator. The difference GMM
estimator has been shown to be biased because the use
of lagged levels of the explanatory variables as instru-
ments for the regression equation in differences is inap-
propriate, especially when the explanatory variables are
persistent over time. Additionally, the difference GMM
estimator eliminates the country-specific effect. The
SGMM estimator overcomes these difficulties. The SGMM
estimator combines the regression in differences with the
regression in levels. As in the difference GMM, lagged
levels of the explanatory variables are used as instru-
ments for the regression in differences. Additionally, the
instruments for the regression in levels are the lagged
differences of the corresponding variables. Finally, we
assume that although there may be a correlation between
the independent variables and the country-specific effect,
there is no correlation between the differences of these
variables and the country-specific effect.
There are two variants of the SGMM estimator; the
one-step estimation and the two-step estimation. We use
the two-step estimator with Windmeijer (2005) corrected
standard errors because this is asymptotically more effi-
cient than the one-step estimator. We use orthogonal
deviations because we have a panel with gaps to maximize
the sample size. The SGMM estimator is suitable and
particularly relevant for this study for several reasons.
First, it is designed for situations with short time peri-
ods and many individuals (Roodman, 2006). Our time
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8 FEATURE ARTICLE

period is short (five years) and we have a large number
of SSA countries. Second, the GMM approach allows us
to treat growth as a dynamic process, thus accounting
explicitly for the possibility that previous growth may
influence future growth. Third, the use of the GMM
approach allows us to control for the endogeneity of the
explanatory variables. To check for the consistency of our
estimates, we employ two specification tests: the Sargan/
Hansen test of overidentification restrictions and the
Arellano and Bond test for second-order serial correla-
tion in the error term. The Sargan/Hansen test measures
the validity of the instruments by analyzing sample ana-
logues of the moment conditions used in the estimation.
By construction, the error term may be serially correlated
in the first order. However, second-order serial correla-
tion is a sign of misspecification.
Empirical Results and Discussion
In this section, we present and discuss the results obtained
in the empirical analysis. We first present the descriptive
statistics, which enable us to explore the data at our
disposal. We then present a correlation matrix, which
aids in the empirical specification. Finally, we present the
formal empirical analysis that tests the hypothesis that
the level of financial development and natural resource
endowment in SSA may influence how FDI interacts
with institutions to promote economic growth. Table 1
presents the descriptive statistics. The average GDP per
capita is US$1,014. Further, the average initial GDP per
capita is US$813.76. Together, these statistics show that
the average per capita income in SSA is very low. Using
the World Bank classification,1 we found that on average,
SSA countries fall into the low-income category. Over the
period 1996–2010, FDI to SSA averaged approximately
5.28% of GDP. This suggests that FDI has been an impor-
tant source of development finance for SSA countries.
Regarding institutions, the aggregate institutional
indicator from Kaufmann et al. (2010) averages approxi-
mately 31. This result suggests that institutions in SSA
as a whole are weak. The stylized facts on institutions
in the second section point to institutional vulnerabili-
ties in SSA. The data suggest that SSA is highly open to

TABLE 1 Descriptive Statistics

Variable Obs Mean Std Dev Min Max
GDPPC 226 1014.385 1619.679 85.53584 8606.286
Initial GDPPC 225 813.757 1246.549 58.08326 6242.095
FDI 228 0.0528 0.0911 −0.0372 0.7207
Governance Indicators
Institutions 235 30.5076 17.9535 0.3181 74.6090
Contcorrupt 235 32.2811 22.1955 0 80.1965
Goveff 235 27.6465 20.5828 0 76.8293
Polstab 235 34.2381 23.5048 0 88.9423
Regquality 235 28.7469 18.2692 0 76.2724
Rulelaw 235 29.0193 20.6900 0 82.6156
Voice 235 31.1139 20.2899 0.4808 78.3654
Controls
Population growth 235 0.02410 0.0097 −0.0031 0.0735
Trade 225 0.7789 0.3733 0.2313 2.45805
Savings 207 0.0966 0.2067 −0.6287 0.8763
HDI 230 0.4427 0.1147 0.2777 0.7908
Financial development 223 0.3261 0.2536 0.0560 1.5547
Natural resources 229 0.1443 0.1791 0.0001 0.9481

Note: GDPPC represents GDP per capita. Initial GDPPC represents GDP per capita in 1996. FDI represents net inflows of FDI scaled by GDP. Institutions
represent the simple average of the Kaufmann et al. (2010) six dimensions of worldwide governance indicators. Contcorrupt represents control of corruption.
Goveff represents government effectiveness. Polstab represents political stability and absence of violence. Regquality represents regulatory quality. Rulelaw
represents the rule of law. Voice represents voice and accountability. Population growth shows the growth in population. Trade is the sum of merchandise imports
and exports scaled by GDP. Savings is measured as savings divided by GDP. HDI represents the Human Development Index.

Thunderbird International Business Review DOI: 10.1002/tie

 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions
international trade, with the sum of exports and imports
averaging approximately 77.89% of the total GDP. The
level of savings averages approximately 9.66% of the GDP.
The average savings rate is 9.66% over the period 1996–
2010 compared to 10.3% during 1974–1980 and 5.7%
during 1991–1996. Human capital, as measured by the
HDI, registers a mean of 0.4427. Thus, the level of human
development in SSA is below 50%, which indicates that
the level of human development in Africa is very low.
Table 2 presents the pairwise correlation matrix for
the variables that are employed in the empirical analysis.
Unsurprisingly, Kaufmann et al.’s (2010) six dimensions
of institutions exhibit a high pairwise correlation among
each other. The aggregate institutional indicator, which
is a simple average of the six dimensions, also exhibits a
high correlation with its six subcomponents. An examina-
tion of Table 2 raises no general concern about multicol-
linearity because the other independent variables do not
exhibit very high correlations.
Regression Results
In this subsection, we present and discuss the empirical
results from the cross-country regressions. The regres-
sion results are presented in Tables 3, 4, and 5. Table 3
presents the results for the full sample. Table 4 presents
the results for the subsample that excludes countries with
developed financial markets. Finally, Table 5 presents the
results for the subsample that excludes countries that are
endowed with natural resources. There are seven regres-
sions in each table. The first regression reports the regres-
sion estimates using the aggregate Kaufmann institutional
indicator. The subsequent six columns present the esti-
mates of the individual components of institutions, which
comprise corruption, government effectiveness, political
stability and absence of violence, regulatory quality, rule
of law, and voice and accountability.
Full Sample
The results in Table 3 show that neither FDI nor institu-
tions are statistically significant on their own. We inves-
tigate whether FDI in the presence of good institutions
promotes economic growth. We do not find strong
evidence indicating that FDI together with good institu-
tions promote growth. Only one of the seven regressions
is found to be significant. In particular, we find only the
interaction of FDI and political stability to be margin-
ally significant at the 10% level (see Model 4). Thus,
in the full sample, we do not find strong and convinc-
ing evidence that FDI and institutions together lead to
economic growth. This leads us to examine in a more
detailed fashion the conditions under which FDI and
DOI: 10.1002/tie
9
institutions promote economic growth. To do this, in
a given year, we drop countries whose observations for
financial development and natural resource abundance
lie above their mean indicators.
Subsample that Excludes Countries with Developed Financial
Markets
When we exclude countries that have developed financial
markets, we obtain interesting and remarkable results.
As in the full sample, FDI is mostly insignificant. Only
in Model 11 does FDI become negative and significant
at the 10% level. This result suggests that FDI on its own
does not promote economic growth in these countries.
Indeed, FDI may be detrimental to growth, given the
negative coefficients (only one being significant). In the
subsample, however, we find evidence of a direct and
positively significant relationship between institutions
and economic growth (see Models 8 and 12). This evi-
dence suggests that institutions are positively related to
economic growth. We continue by examining the interac-
tion between FDI and institutions to check whether qual-
ity institutions will support FDI in positively impacting
growth. This is because of the negative and mostly insig-
nificant relationship between FDI and economic growth.
When we interact FDI with institutions, we find that good
institutions facilitate FDI’s positive impact on growth.
This is true for most of the individual constituents of
institutions, as shown in Models 8, 10, 11, 13, and 14. Our
results indicate that if the government is effective, the
political environment is stable, there is rule of law, and
people can express themselves freely, a host country can
realize the growth benefits of FDI if it improves its institu-
tions, even in the absence of a well-developed financial
market. This is because good institutions can help over-
come some of the deficiencies that FDI will encounter in
host countries that have less developed financial markets.
Subsample that Excludes Countries Endowed with Natural
Resources
Next, we present the results for the subsample that
excludes countries that lie above the mean of the indica-
tor of natural resource endowment. The results from this
experiment are stunning and quite insightful. We find
clearly that in these countries, FDI on its own seems to
exert a positive influence on economic growth (see Mod-
els 16, 18, and 21). This is likely to be the case because a
country that is abundant in natural resources will export
most of these resources. An increase in exports leads
to currency appreciation, which renders firms from the
exporting country less competitive. This means that
countries that are abundant in natural resources will have
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 10 FEATURE ARTICLE

TABLE 2 Correlation Matrix (Kaufmann et al. Governance Indicators)

Thunderbird International Business Review

Gdppc InitialGDPPC FDI Insti Contcorrupt Goveff Polstab Regquality Rulelaw Voice Popgrowth Trade Savings HDI
GDPPC 1.0000
Initial GDPPC 0.9470* 1.0000
FDI 0.0657 −0.0308 1.0000
Insti 0.5280* 0.5436* −0.1415* 1.0000
Contcorrupt 0.4436* 0.4677* −0.1194* 0.8894* 1.0000
Goveff 0.5366* 0.5549* −0.1304* 0.9163* 0.8282* 1.0000
Polstab 0.3532* 0.3493* −0.0495 0.6697* 0.4929* 0.4213* 1.0000
Regquality 0.4687* 0.4929* −0.2048* 0.8753* 0.7202* 0.8597* 0.4290* 1.0000
Rulelaw 0.5111* 0.5250* −0.1131* 0.9503* 0.8485* 0.8778* 0.5540* 0.8231* 1.0000
Voice 0.4028* 0.4089* −0.1258* 0.8737* 0.7030* 0.7871* 0.4791* 0.7504* 0.8239* 1.0000
Popgrowth −0.4466* −0.5214* 0.1003 −0.2921* −0.2649* −0.2852* −0.2590* −0.2022* −0.2654* −0.2191* 1.0000
Trade 0.4776* 0.4048* 0.5175* 0.0958 0.1330* 0.0771 0.1039 −0.0092 0.1419* 0.0246 −0.2892* 1.0000
Savings 0.5670* 0.4835* 0.0985 0.0228 −0.1475* 0.0450 0.1118 0.1518* −0.0106 −0.0173 −0.0430 0.1411* 1.0000
HDI 0.8907* 0.8904* 0.0716 0.6073* 0.5150* 0.6253* 0.3393* 0.5254* 0.6128* 0.5086* −0.4004* 0.4336* 0.4530* 1.0000

Note: *represents significant at 5%. GDPPC represents log of GDP per capita. Initial GDPPC represents log of GDP per capita in 1996. FDI represents net inflows of FDI scaled by GDP. Institutions
represent the simple average of the Kaufmann et al. (2010) six dimensions of worldwide governance indicators. Contcorrupt represents control of corruption. Goveff represents government effectiveness.
Polstab represents political stability and absence of violence. Regquality represents regulatory quality. Rulelaw represents the rule of law. Voice represents voice and accountability. Population growth shows
the growth in population. Trade is the sum of merchandise imports and exports scaled by GDP. Savings is measured as savings divided by GDP. HDI represents the Human Development Index.

DOI: 10.1002/tie
 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions 11

TABLE 3 Foreign Direct Investment and Economic Growth: The Role of Institutions—Full Sample
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
Lag of Log of GDPPC 1.0022*** 1.0428*** 1.0108*** 0.9783*** 1.0299*** 1.0043*** 1.0441***
(0.0425) (0.0447) (0.0420) (0.0682) (0.0642) (0.0431) (0.0488)
Log Initial GDPPC −0.1791*** −0.2181*** −0.1734*** −0.2038*** −0.2195*** −0.1771*** −0.2128***
(0.0476) (0.0571) (0.0498) (0.0642) (0.0687) (0.0497) (0.0565)
FDI 0.1772 0.4626 0.2663 −0.6600 0.3779 0.2274 0.6698
(0.8009) (0.7582) (0.7805) (0.4830) (0.7554) (0.6567) (0.9229)
Institutions 0.1569
(0.3596)
Contcorrupt 0.1880
(0.1785)
Goveff 0.1535
(0.3475)
Polstab 0.1568
(0.2106)
Regquality 0.0148
(0.3250)
Rulelaw 0.1690
(0.2971)
Voice 0.3130
(0.3052)
Interaction 0.0020 −0.0206 0.0027 0.0321* −0.0061 −0.0016 −0.0332
(0.0358) (0.0220) (0.0396) (0.0175) (0.0368) (0.0330) (0.0329)
Trade 0.0925 0.0842* 0.0941 0.0856** 0.0709 0.0902* 0.1069
(0.0678) (0.0470) (0.0581) (0.0374) (0.0652) (0.0534) (0.0734)
Savings 0.3726*** 0.3162*** 0.3592*** 0.3485*** 0.3208*** 0.3806*** 0.3038***
(0.1114) (0.1050) (0.0960) (0.0644) (0.0851) (0.0949) (0.1171)
HDI 0.9247 1.0433* 0.8078 1.4065** 1.2876 0.8586 0.9297*
(0.6399) (0.5784) (0.5821) (0.6345) (0.8325) (0.5878) (0.5449)
Constant 0.5575*** 0.5102*** 0.5238*** 0.6351*** 0.5454 0.5655*** 0.4684***
(0.1461) (0.1743) (0.1281) (0.1835) (0.1886) (0.1503) (0.1743)
Diagnostics
No. of obs 164 164 164 164 164 164 164
No. of groups 43 43 43 43 43 43 43
F 2,688.98 1,452.06 1,794.93 1,696.00 1,482.61 2,107.41 1,619.09
Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
No. of instruments 22 22 22 22 22 22 22
AR(1): z(p value) −0.14 (0.890) −0.16 (0.870) −0.30 (0.766) 0.59 (0.558) −0.14 (0.887) −0.18 (0.857) −0.39 (0.695)
AR(2): z(p value) −1.40 (0.162) −1.40 (0.162) −1.44 (0.150) −1.60 (0.109) −1.44 (0.150) −1.48 (0.139) −1.33 (0.183)
Hansen: χ2 (p value) 17.31 (0.185) 17.88 (0.162) 18.24 (0.148) 12.42 (0.494) 15.88 (0.256) 17.45 (0.180) 16.81 (0.208)

Note: ***, **, *represents significant at 1%, 5%, and 10%, respectively. GDPPC represents log of GDP per capita. Initial GDPPC represents log of GDP per capita
in 1996. FDI represents net inflows of FDI scaled by GDP. Institutions represent the simple average of the Kaufmann et al. (2010) six dimensions of worldwide
governance indicators. Contcorrupt represents control of corruption. Goveff represents government effectiveness. Polstab represents political stability and
absence of violence. Regquality represents regulatory quality. Rulelaw represents the rule of law. Voice represents voice and accountability. Population growth
shows the growth in population. Trade is the sum of merchandise imports and exports scaled by GDP. Savings is measured as savings divided by GDP. HDI
represents the Human Development Index.

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12 FEATURE ARTICLE

TABLE4 Foreign Direct Investment and Economic Growth: The Role of Institutions—Subsample Based on Excluding
Countries with Developed Financial Markets
Model 8 Model 9 Model 10 Model 11 Model 12 Model 13 Model 14
Lag of Log of GDPPC 0.9915*** 1.0138*** 1.0512*** 1.1052*** 1.0369*** 0.9767*** 0.9655***
(0.0561) (0.1258) (0.0848) (0.0872) (0.0882) (0.0779) (0.0967)
Log Initial GDPPC −0.1412 −0.1065 −0.1372** −0.1771** −0.1271* −0.1332** −0.0584
(0.1063) (0.0913) (0.0610) (0.0694) (0.0701) (0.0636) (0.0839)
FDI −0.6147 −0.1836 −0.1788 −0.5701** −0.1336 −0.2822 −0.3383
(0.6452) (0.2289) (0.2105) (0.2323) (0.2320) (0.2308) (0.3030)
Institutions 0.6328***
(0.2226)
Contcorrupt 0.1292
(0.1257)
Goveff 0.1246
(0.0854)
Polstab −0.0361
(0.0542)
Regquality 0.1804*
(0.0929)
Rulelaw 0.0968
(0.1358)
Voice 0.2200
(0.1476)
Interaction 0.0740** 0.0164 0.0284* 0.0172* 0.0176 0.0356** 0.0219*
(0.0337) (0.0189) (0.0157) (0.0093) (0.0129) (0.0156) (0.0125)
Trade 0.1215** 0.0975*** 0.0945** 0.0788** 0.1042*** 0.0826 0.1518***
(0.0581) (0.0365) (0.0388) (0.0384) (0.0354) (0.0567) (0.0349)
Savings 0.5778*** 0.3094*** 0.2373*** 0.2268*** 0.2126*** 0.2953*** 0.3365***
(0.1834) (0.1182) (0.0789) (0.0624) (0.0781) (0.0747) (0.0958)
HDI −0.1649 0.1496 0.2051 0.1730 0.1751 0.6221 0.0684
(1.1015) (0.4897) (0.4629) (0.2825) (0.4848) (0.5411) (0.6118)
Constant 0.6288** 0.3900** 0.3316*** 0.3362*** 0.3470*** 0.5774*** 0.3608**
(0.2932) (0.1561) (0.1088) (0.1158) (0.1272) (0.1909) (0.1783)
Diagnostics
No. of obs 108 108 108 108 108 108 108
No. of groups 33 33 33 33 33 33 33
F 932.17 794.14 1488.46 763.71 1224.92 703.97 325.27
Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
No. of instruments 22 44 39 44 44 35 43
AR(2): z(p value) −1.51 (0.131) −1.35 (0.177) −1.41 (0.159) −1.51 (0.132) −1.40 (0.161) −1.47(0.143) −1.47 (0.142)
Hansen: χ2 (p value) 9.62 (0.725) 20.59 (0.975) 21.29 (0.879) 20.90 (0.971) 21.14 (0.969) 19.26 (0.825) 20.77 (0.964)

Note: ***, **, *represents significant at 1%, 5%, and 10%, respectively. GDPPC represents log of GDP per capita. Initial GDPPC represents log of GDP per capita
in 1996. FDI represents net inflows of FDI scaled by GDP. Institutions represent the simple average of the Kaufmann et al. (2010) six dimensions of worldwide
governance indicators. Contcorrupt represents control of corruption. Goveff represents government effectiveness. Polstab represents political stability and
absence of violence. Regquality represents regulatory quality. Rulelaw represents the rule of law. Voice represents voice and accountability. Population growth
shows the growth in population. Trade is the sum of merchandise imports and exports scaled by GDP. Savings is measured as savings divided by GDP. HDI
represents the Human Development Index.

Thunderbird International Business Review DOI: 10.1002/tie

 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions 13

TABLE5 Foreign Direct Investment and Economic Growth: The Role of Institutions—Subsample Based on Excluding
Countries with Abundant Natural Resources
Model 15 Model 16 Model 17 Model 18 Model 19 Model 20 Model 21
Lag of Log of GDPPC 0.9933*** 1.2228*** 1.2210*** 1.2550*** 1.2001*** 1.1721*** 1.1599***
(0.1882) (0.0697) (0.0627) (0.0995) (0.0783) (0.1115) (0.0987)
Log Initial GDPPC −0.0883 −0.3049*** −0.2602*** −0.3019*** −0.2741*** −0.2602* −0.2299
(0.1615) (0.0604) (0.0621) (0.0842) (0.0668) (0.1364) (0.1408)
FDI 0.8156 1.6007** 0.7527 2.4120* 1.4645 0.9764 2.0585**
(1.7496) (0.7318) (0.5006) (1.2913) (1.5314) (0.8183) (0.9718)
Institutions 0.5669*
(0.3052)
Contcorrupt 0.1650**
(0.0713)
Goveff 0.1781***
(0.0577)
Polstab 0.1726*
(0.0891)
Regquality 0.2594**
(0.1089)
Rulelaw 0.3283**
(0.1541)
Voice 0.3752*
(0.1956)
Interaction −0.0185 −0.0263* −0.0124 −0.0599** −0.0289 −0.0214 −0.0395
(0.0359) (0.0146) (0.0148) (0.0288) (0.0325) (0.0211) (0.0253)
Trade 0.0561 0.0231 0.0773** 0.0351 0.0364 0.0658 0.0764
(0.0684) (0.0393) (0.0315) (0.0407) (0.0295) (0.0753) (0.0578)
Savings 0.1667 0.0904 0.1651** 0.0379 0.0727 0.1777 0.1369
(0.1184) (0.0731) (0.0635) (0.0953) (0.0775) (0.1189) (0.0851)
HDI 0.1815 0.4479** −0.0391 0.5038 0.2913 0.1029 0.3016
(0.4653) (0.2148) (0.2045) (0.3557) (0.4169) (0.5250) (0.4904)
Constant 0.2870 0.2301 0.1513* −0.0072 0.2164 0.3395 0.1035
(0.2187) (0.1573) (0.0795) (02.049) (0.1478) (0.2536) (0.2328)
Diagnostics
No. of obs 117 117 117 117 117 117 117
No. of groups 35 35 35 35 35 35 35
F 1,082.64 1,333.43 1,818.71 577.94 1,344.02 1,010.39 662.35
Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
No. of instruments 22 43 39 43 43 34 42
AR(2): z(p value) −1.15 (0.249) −0.53 (0.593) −0.69 (0.490) −0.28 (0.778) −0.46 (0.648) −0.99 (0.323) −0.04 (0.965)
Hansen: χ2 (p value) 16.79 (0.209) 26.29 (0.825) 24.08 (0.768) 27.99 (0.757) 30.09 (0.660) 28.69 (0.277) 26.07 (0.799)

Note: ***, **, * represents significant at 1%, 5%, and 10%, respectively. GDPPC represents log of GDP per capita. Initial GDPPC represents log of GDP per capita
in 1996. FDI represents net inflows of FDI scaled by GDP. Institutions represent the simple average of the Kaufmann et al. (2010) six dimensions of worldwide
governance indicators. Contcorrupt represents control of corruption. Goveff represents government effectiveness. Polstab represents political stability and
absence of violence. Regquality represents regulatory quality. Rulelaw represents the rule of law. Voice represents voice and accountability. Population growth
shows the growth in population. Trade is the sum of merchandise imports and exports scaled by GDP. Savings is measured as savings divided by GDP. HDI
represents the Human Development Index.

DOI: 10.1002/tie Thunderbird International Business Review

14 FEATURE ARTICLE
uncompetitive firms, including those operated by FDI,
which may be detrimental to growth in the exporting
country. Thus, in these countries, the “resource curse”
effects are very pronounced and are likely to hinder the
growth-enhancing effect of FDI. Further, countries that
are less abundant in resources will attract FDI into other
sectors of their economies, whereas FDI in countries that
are abundant in natural resources will concentrate on
the sectors that have natural resources. Because FDI that
is concentrated in more abundant-resource countries will
usually bring both their experts and inputs into the coun-
tries, they tend to have less direct linkages with the host
country. As a result, the host country does not benefit
from this inward FDI. For instance, FDI that goes into the
primary sector will create fewer jobs than FDI that goes
into the secondary and tertiary sectors. Indeed, the extant
literature shows quite convincingly that FDI into these
other sectors has stronger linkages with the real economy.
This may explain the observed positive relationship
between FDI and economic growth in this subsample.
In terms of institutions, the results suggest a direct
role for institutions in enhancing economic growth. We
find overwhelming evidence of a positive relationship
between institutions and economic growth. Indeed, all of
the indicators of institutional quality, that is, control of
corruption, government effectiveness, political stability,
regulatory quality, rule of law, and voice and account-
ability, appear to matter for economic growth in this
subsample (see Models 15–21). Therefore, better growth
outcomes can be achieved by reducing corruption,
improving government effectiveness, promoting politi-
cal stability, enhancing regulatory quality, abiding by the
rule of law, and allowing voice and accountability. Finally,
the results seem to indicate that in these countries, the
growth effects of FDI diminish as the quality of institu-
tions improves (see the interaction terms in Models 16
and 18). These results are puzzling but suggest that the
beneficial effects of FDI in countries with low natural
resources reduce as institutional quality increases.
Controls
In all of the regressions, the lag of the dependent vari-
able is positive and significant. This suggests that past
growth influences current or contemporaneous eco-
nomic growth and provides further justification for the
adoption of the dynamic panel estimation technique.
Further, the log of initial GDP per capita enters most
regressions (16/21) as negative and significant. This
finding suggests that countries that started out richer
tend to grow at a slower rate. In most of the regressions,
savings (15/21) and trade (10/21) enter as positive and
Thunderbird International Business Review
significant. With regard to savings, the empirical results
suggest that countries that save more grow faster than
do their counterparts that have a lower savings rate. The
level of savings is important because countries that have
a higher savings rate can afford to invest more than those
with a lower savings rate. Further, countries that are open
to trade tend to grow faster. Merchandise trade consists
of imports and exports. Imports allow countries to get
access to goods and services that cannot be produced
and sold at a competitive price and quality level domesti-
cally. Further, countries that are open to trade are able to
export their raw materials, natural resources, and other
goods and services. Thus, open trade enables countries
to import and export goods and services, thereby promot-
ing economic activities. In a few instances (4/21), human
development enters the empirical modeling as positive
and significant. Thus, we find some evidence that human
development tends to increase economic growth.
Conclusion and Recommendations
This article examines the relationship among FDI, insti-
tutional quality and economic growth in SSA. We hypoth-
esize that the relationship may differ based on country
characteristics such as the level of financial development
and natural resource endowment because SSA countries
are characterized by different levels of financial develop-
ment and natural resource endowment. The literature
suggests that various forms of absorptive capacities,
such as open trade, human capital, institutions, macro-
economic stability and infrastructure, are required for
countries to benefit from FDI. However, these effects
have primarily been analyzed separately in prior research
efforts. We examine how FDI interacts with institutions in
various country environs, that is, various levels of finan-
cial development and natural resource endowment. We
use SGMM two-step estimator with Windmeijer corrected
standard errors and orthogonal deviations to examine
the empirical relations.
Several significant, insightful, and far-reaching impli-
cations emerge from the findings of this study. First,
when we examine the full sample, we find no relationship
between FDI and economic growth or between institu-
tions and economic growth. Further, we do not find
strong evidence that the quality of institutions favorably
alters the effect of FDI on economic growth. This leads us
to examine various subsamples based on financial devel-
opment and natural resource endowment. When we drop
countries with developed financial markets, we still do
not find a significant effect of FDI on economic growth.
However, we do find evidence of a positive effect of
DOI: 10.1002/tie
 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions 15

institutions on economic growth. Therefore, in countries
that do not have developed financial markets, institutions
seem to enhance economic growth. In addition, we find
that the quality of institutions favorably alters the effect
of FDI on economic growth because improving the qual-
ity of institutions enables these countries to overcome
some of the deficiencies associated with an undeveloped
financial market. Consequently, putting in place policies
to improve the quality of their institutions should pay
significant dividends. Implementing these policies will
help these countries benefit from FDI. As a bonus, the
improvements in institutional quality on their own yield a
positive impact on economic growth.
The results also suggest that in countries that are not
endowed with natural resources, FDI and institutions on
their own are sufficient to promote growth. However, the
growth-enhancing effects of FDI decrease as institutions
improve in these countries. Thus, in countries with low
natural resources, a focus on attracting FDI should be
sufficient to promote growth, given the nature or type of
FDI that these countries are likely to attract. These types
of FDIs (nonresource FDI) have stronger and direct link-
ages to the host economy. For example, more jobs can
be created, higher levels of technological transfer can
ensue and more supplies can be obtained from the local
economy because FDI relies on host countries for inputs.
It is therefore important for such countries to devise
policies that will attract FDI. Further, institutions also
have a positive relationship with economic growth. Thus,
these countries would benefit from improving the quality
of institutions to achieve higher growth. However, these
countries should note that the additional growth benefits
from FDI reduce as institutional quality improves. Our
results point to the conclusion that one size does not
fit all. Therefore, policymakers should consider their
own context before implementing policies to realize the
growth effects of FDI.
Acknowledgment
We are very grateful for the comments of the reviewers
and editor. They were instrumental in improving the
quality of this paper. As usual, all errors and omissions
remain ours.
Note
1. According to the World Bank classifications, countries with a per-
capita income of less than $1,035 fall into the low-income category.
Countries with a per-capita income of $1,036 to $4,085 fall into the
lower-middle-income category. Countries with a per-capita income of
$4,086 to $12,615 fall into the upper-middle-income category. Finally,
countries with a per-capita income exceeding $12,616 fall into the high-
income category.

Elikplimi Komla Agbloyor is a lecturer in finance at the University of Ghana Business School. He received his
PhD in finance from the University of Ghana in November 2012. His research interests include banking, corporate
governance, crossborder mergers and acquisitions, economic growth and development, financial development,
institutions, international capital flows (FDI, portfolio flows and debt flows), and remittances.

Agyapomaa Gyeke-Dako has a PhD in financial and development economics from the University of Nottingham
(United Kingdom). She is currently a lecturer at the University of Ghana Business School. Prior to her joining the
University of Ghana, she worked with Durham Business School (United Kingdom) as a teaching fellow for three
years. She has published in the University of Peking Press and has submitted a number of papers for publication.
She is also now a coresearcher on a collaborative research with the World Trade Institute, University of Geneva,
and WITS University South Africa (funding from Swiss Science Foundation and Swiss Agency for Development and
Cooperation). In addition, she is working on a project funded by the International Growth Centre. She has been
affiliated with the Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) and the Chinese
Economic Association (CEA). Her research interest is in the area of financial and development economics.

Ransome Kuipo is a Chartered Accountant and has been a lecturer in accounting since 1997. He holds an MBA
(accounting) under a USAID/UG fellowship from Legon, and became a Chartered Accountant in 1998. He is cur-
rently a PhD research fellow in international business economics. Prior to academia, he was a member of the team
of local and international Arthur Andersen consultants that provided specialty management, accounting, and tax
advisory services to a wide range of clients in industry and government in Ghana.

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16 FEATURE ARTICLE
Joshua Yindenaba Abor is a professor of finance at the University of Ghana Business School (UGBS). He is also
researcher with the African Economic Research Consortium, and his areas of research interest include develop-
ment finance, banking, financial market development, small business finance, corporate finance and governance,
international finance, issues in financial economics, and health finance.
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Thunderbird International Business Review
 APPENDIX 1 Countries with the Best and Worst Institutions in Africa
18 FEATURE ARTICLE

Voice and Regulatory Government Control of

Accountability Rank Rule of Law Rank Quality Rank Political Stability Rank Effectiveness Rank Corruption Rank
Top 10 Countries with the Best Institutions

Thunderbird International Business Review

Mauritius 73 Mauritius 79 Botswana 70 Botswana 80 Mauritius 72 Botswana 79
Cape Verde 72 Botswana 68 Mauritius 68 Cape Verde 77 South Africa 72 Mauritius 72
South Africa 68 Cape Verde 65 South Africa 67 Mauritius 77 Botswana 71 South Africa 68
Botswana 65 Seychelles 59 Namibia 58 Seychelles 77 Namibia 61 Seychelles 66
Namibia 58 Namibia 58 Uganda 52 Namibia 67 Seychelles 60 Namibia 65
Sao Tome and Principe 57 South Africa 56 Ghana 47 Benin 64 Ghana 54 Cape Verde 63
Benin 55 Ghana 51 Cape Verde 47 Sao Tome and Principe 62 Cape Verde 54 Lesotho 55
Ghana 54 Lesotho 49 Kenya 45 Gambia, The 55 Senegal 47 Ghana 55
Mali 54 Senegal 48 Senegal 45 Gabon 54 Lesotho 47 Madagascar 54
Seychelles 53 Gambia, The 46 Burkina Faso 45 Zambia 52 Mozambique 39 Eritrea 53
Top 10 Countries with the Worst Institutions
Angola 12 Chad 8 Burundi 10 Ethiopia 11 Sierra Leone 8 Burundi 12
Zimbabwe 12 Guinea 7 Sudan 8 Guinea 10 Congo, Rep. 8 Zimbabwe 11
Swaziland 12 Guinea-Bissau 7 Comoros 7 Chad 9 Togo 7 Nigeria 10
Rwanda 11 Angola 6 Liberia 7 Nigeria 7 Liberia 5 Chad 10
Congo, Dem. Rep. 7 Zimbabwe 6 Equatorial Guinea 7 Central African Republic 7 Central African Republic 5 Sudan 8
Sudan 5 Sudan 6 Eritrea 7 Burundi 5 Equatorial Guinea 4 Angola 5
Equatorial Guinea 4 Central African Republic 5 Congo, Dem. Rep. 5 Sudan 2 Comoros 4 Congo, Dem. Rep. 3
Eritrea 4 Congo, Dem. Rep. 2 Zimbabwe 5 Congo, Dem. Rep. 2 Congo, Dem. Rep. 2 Equatorial Guinea 2
Somalia 2 South Sudan 0 South Sudan 0 South Sudan 1 Somalia 0 Somalia 1
South Sudan 1 Somalia 0 Somalia 0 Somalia 0 South Sudan 0 South Sudan 0

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 Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions 19

APPENDIX 2 List of Countries APPENDIX 3 (Continued)

1 Angola 25 Liberia 15 Niger
2 Benin 26 Madagascar 16 Nigeria
3 Botswana 27 Malawi 17 Rwanda
4 Burkina Faso 28 Mali 18 Senegal
5 Burundi 29 Mauritania 19 Sierra Leone
6 Cameroon 30 Mauritius 20 Somalia
7 Cape Verde 31 Mozambique 21 Tanzania
8 Central African Republic 32 Namibia 22 Zambia
9 Chad 33 Niger 23 Zimbabwe
10 Comoros 34 Nigeria
11 Congo, Dem. Rep. 35 Rwanda
12 Congo, Rep. 36 Sao Tome and Principe 4 List of Countries Endowed with Natural
APPENDIX

13 Cote d’Ivoire 37 Senegal

Resources
14 Djibouti 38 Seychelles 1 Angola
15 Equatorial Guinea 39 Sierra Leone 2 Burundi
16 Eritrea 40 Somalia 3 Chad
17 Ethiopia 41 South Africa 4 Congo, Dem Rep
18 Gabon 42 Swaziland 5 Congo, Rep
19 Gambia, The 43 Tanzania 6 Equatorial Guinea
20 Ghana 44 Togo 7 Ethiopia
21 Guinea 45 Uganda 8 Gabon
22 Guinea-Bissau 46 Zambia 9 Guinea
23 Kenya 47 Zimbabwe 10 Guinea-Bissau
24 Lesotho 11 Liberia
12 Mauritania
13 Mozambique
APPENDIX 3 List of Countries with Developed Financial 14 Nigeria
Markets 15 Sao Tome and Principe
16 Sierra Leone
1 Benin
17 Somalia
2 Botswana
18 Uganda
3 Cape Verde
19 Zambia
4 Congo, Dem Rep
5 Equatorial Guinea
6 Eritrea
7 Gabon
8 Guinea
9 Guinea-Bissau
10 Kenya
11 Mali
12 Mauritania
13 Mauritius
14 Mozambique

(Continued)

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