Journal of African Business

ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/wjab20

Ethical Behavior of Firms and Foreign Direct

Investments in African Settings: The Moderating
Effect of Judicial Independence

Imen Khelil, Achraf Guidara & Hichem Khlif

To cite this article: Imen Khelil, Achraf Guidara & Hichem Khlif (2022): Ethical Behavior of
Firms and Foreign Direct Investments in African Settings: The Moderating Effect of Judicial
Independence, Journal of African Business, DOI: 10.1080/15228916.2022.2126591

To link to this article: https://doi.org/10.1080/15228916.2022.2126591

Published online: 23 Sep 2022.

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JOURNAL OF AFRICAN BUSINESS
https://doi.org/10.1080/15228916.2022.2126591

Ethical Behavior of Firms and Foreign Direct Investments in

African Settings: The Moderating Effect of Judicial
Independence
Imen Khelila, Achraf Guidarab and Hichem Khlif c

a
Department of Accounting, Prince Sultan University, Riyadh, Kingdom of Saudi Arabia; bFaculty of business
management, Majan University College, Sultanate of Oman, Muscat; cFaculty of Economics and
Management of Sfax, University of Sfax, Sfax, Tunisia

ABSTRACT KEYWORDS
This paper examines the relationship between ethical behavior of Ethical behavior of firms;
firms and foreign direct investments in African countries and tests judicial independence;
whether the judicial independence moderates this association. The foreign direct investments
sample includes 108 country-year observations over a period of
2014–2017. Findings show that the ethical behavior of firms is
positively associated with foreign direct investment. Similarly, judi­
cial independence has a positive and significant effect on the same
variable. When testing for the moderating effects of judicial inde­
pendence, the association between ethical behavior of firms and
foreign direct investment remains positive and significant for high
judicial independence sub-sample, while it becomes insignificant
for countries characterized by low judicial independence. The find­
ings highlight the importance of business ethics in attracting for­
eign direct investment inflows in African countries. It also
emphasizes the need to consider the role played by high judicial
independence in strengthening this association. These results sig­
nal to policy makers in African countries the importance of adopt­
ing enforcing rules obliging firms to act ethically and strengthening
judicial independence.

1. Introduction
Foreign investments are of particular importance to countries in early stages of economic
development as they provide an economic progress for these economies (Gordon, Loeb,
& Zhu, 2012). More specifically, foreign direct investments play an important role in the
development of African economies through job creation, human capital development,
transfer of modern technology and global economy integration (Agyemang, Gbettey,
Gatsi, & Acquah, 2019; Dupasquier & Osakwe, 2003).
Given this importance, there is a large body of research in the fields of international
business and economics that investigates the determinants of foreign direct investments
(e.g. Agyemang et al., 2019; Agarwal, 1980; Gordon et al., 2012). Aside from classic
economic and demographic determinants (e.g. unemployment rate, exchange rates), this

CONTACT Hichem Khlif hichemkhlif@gmail.com Faculty of Economics and Management of Sfax, University of
Sfax, Sfax, Tunisia
© 2022 Taylor & Francis Group, LLC
2 I. KHELIL ET AL.

stream of research has focused on new determinants such as IFRS adoption (Gordon
et al., 2012) or country-level corporate governance attributes (Agyemang et al., 2019;
Appiah-Kubi et al., 2020). Recent review conducted by Tocar (2018) identifies several
categories of the determinants of foreign direct investments dealing economic, techno­
logical, demographic, cultural and legal and institutional factors. He suggests that extant
literature often emphasizes the economic factors, while neglecting other aspects dealing
with ethics and legal characteristics.
Luo et al. (2009) suggest that corporate governance model differences affect foreign
direct investment in emerging economies. However, corporate governance in African
settings is characterized by imperfect and incomplete markets, and corporate governance
structures are not well developed (Agyemang et al., 2019). It should be noted that
corporate scandals in both sides of Atlantic occurring in well developed corporate
governance system (e.g. Enron in USA) suggest that corporate governance model can
deviate for its core objective in the absence of business ethics. Accordingly, ethical
behavior of firms may contribute to good corporate governance in emerging economies
(Armitage, Hou, Sarkar, & Talaulicar, 2017). Adeleye, Luiz, Muthuri, and Amaeshi
(2020) posit that business ethics in Africa – as a field of practice has significantly evolved
over the last two decade. Therefore, it becomes interesting to integrate business ethics, as
proxied by ethical behavior of firms, as a potential determinant of foreign direct invest­
ments in African settings. Bardy et al. (2012, p. 278) highlight the complexity and
challenges of moving to a more ethically responsible vision of capitalism across borders.
They also note that (p. 278) “studies addressing the links between cross-border business
and ethical considerations are less abundant”. In addition, Beazer and Blake (2018, p. 471
& 472) argue that “ . . . firms avoid investment locations where formal institutions cannot
credibly protect actors against expropriation by private actors or by the state itself. Instead,
firms prefer locations with well-functioning institutions, such as strong courts, that can
check opportunistic officials and allow businesses to defend their contracts and property
rights in a timely, predictable manner”. Strong courts refer to high judicial independence
that allows judges to protect cross-border investors from opportunistic acts committed
by public officials or private actors in the host country. Thus, judicial independence may
play a critical role in enhancing both business ethics and foreign direct investments.
Therefore, the aim of this study is to examine the association between ethical behavior
of firms and foreign direct investments. Furthermore, we deepen the analysis by exam­
ining whether jurisdictional environment, as proxied by judicial independence, moder­
ates this association. Foreign investors consider that it is more easy to establish and
expand their investments in economies characterized by high levels of ethical standards
as these norms may signal to them that local businesses are mainly based on mutual trust
and transparency (Kasser & Sheldon, 2009). Accordingly, we expect that countries
characterized by high ethical behavior of firms are more attractive for foreign direct
investments. Furthermore, we assume that this relationship will be more pronounced in
setting characterized by high level of judicial independence as this jurisdictional feature
represents the ultimate assurance for foreign investors to preserve their interests in case
of litigations in hosting country.
Based on a sample of 108 country-year observations over the period of 2014–2017, we
find that ethical behavior of firms is positively associated with foreign direct investments.
When testing for the moderating effect of judicial independence on the association
 JOURNAL OF AFRICAN BUSINESS 3

between ethical behavior of firms and foreign direct investments, the results show that
the positive and significant association between ethical behavior of firms and foreign
direct investments remains stable for settings characterized by high judicial indepen­
dence, while it becomes insignificant for African settings characterized by low judicial
independence.
Our study contributes to the large body of research concerning determinants of
foreign direct investments by highlighting the importance of business ethics in
attracting foreign direct investment inflows in African countries. More specifically,
our paper complements and corroborates previous findings reported by Agyemang
et al. (2019) and Appiah-Kubi et al. (2020) who have documented also that ethical
behavior of firms has a positive effect on foreign direct investments for African
countries for previous periods. These findings alert governments in African econo­
mies about the importance of the implementations of ethical standards by strengthen­
ing the ethics training of employees; promoting transparency with respect to resource
allocation; and enforcing stricter sanctions on corrupt practices. In addition, strength­
ening judicial independence may give more assurance to foreign investors when
investing in emerging economies as they will be able to protect their rights from
any kind of expropriation from local managers, investors or government officials. In
addition, foreign investors may prefer to invest in countries characterized by strong
ethical commitments and strong courts (judicial independence) to protect themselves
from opportunistic acts committed by public officials or private actors in the host
country.
The rest of the paper is structured as follows. Section 2 conducts a literature review
with respect to the determinants of foreign direct investments. Section 3 develops
theoretical bases for the association between ethical behavior of firms and foreign direct
investment and how judicial independence may moderate this relationship. Section 4
describes the research methodology. Section 5 presents the empirical findings of this
study. Finally, section 6 concludes the paper.

2. Literature review
This section is devoted to conduct a theoretical review dealing with the main theories
justifying the choice of multinational companies to invest in emerging economies,
namely, the theory of product life cycle and Eclectic theory. Then, we briefly review the
empirical literature dealing with the determinants of foreign direct investments in
African countries.
On the one hand, the theory of product life cycle developed by Vernon (1996) suggests
that a firm tends to become multinational at a certain stage in its growth to lower costs
(e.g. wages) and gain new markets. According to this theory, there are three stages in the
life of a product including the launching product stage, maturing product stage and
standardized product stage (Asiamah, Ofori, & Afful, 2019). At the first stage, the
expansion of firm activity is achieved through exports. In the second and third stages,
the expansion of firm activity is conducted through foreign direct investments. This
expansion allows firms to realize economies of scales and reduces uncertainty. This
theory helps to explain the argument that foreign direct investments to any country
4 I. KHELIL ET AL.

depend on the adequacy of several factors linked to legal and institutional characteristics
(Asiamah et al., 2019).
On the other hand, Eclectic theory developed by Dunning (1993/2000) refers to
a group of conditions that may increase the likelihood for a given country to be a host
one of foreign direct investments. These conditions deal essentially with ownership
advantages, localization considerations and internalization gains (Asiamah et al., 2019).
This theory posits that the expansion through the establishment of production units
abroad allows the reduction of several costs related to transport, market uncertainty and
labor costs which are generally lower in emerging economies.
Overall, these two theories suggest that the level of foreign direct investments,
in a given country, is mainly driven by the capability of any firm to realize gains
and ensure the stability of new markets. However, these theories highlight also
the importance of the economic environment prevailing in a host country (e.g.
technological and demographic factors), as well as other characteristics linked to
corporate governance system, legal and institutional infrastructure and business
ethics.
From an empirical standpoint, several studies have examined the determinants
of foreign direct investments in African settings. These empirical enquiries have
mostly dealt with economic factors. For instance, Bende-Nabende (2002) docu­
ment that market growth, a less restrictive export-orientation strategy, real effec­
tive exchange rates, market size and openness of the economy represent the most
dominant long-run determinants of foreign direct investments for 19 Sub-Saharan
African countries over the period of 1970–2000. Lemi and Asefa (2003) provide
evidence that economic and political uncertainty negatively affects foreign direct
investments in African countries. Kandiero and Chitiga (2014) found a negative
association between real exchange rate and foreign direct investments for
a sample of 38 African countries.
Other studies focus on the effect of infrastructure quality on foreign direct investments
in African settings. For instance, Asiedu (2002) provides evidence that infrastructure
development represents a major determinant of foreign direct investments in African
countries.
Aside from these studies that focus specifically on economic determinants or
infrastructure quality, other empirical enquiries have examined how business
ethics may affect foreign direct investments in Africa. Agyemang et al. (2019)
have examined the relation between ethical behavior of firms and foreign direct
investments in African settings. They provide evidence ethical behavior of firms is
positively and significantly related to foreign direct investments. Similarly,
Appiah-Kubi et al. (2020) examine the same association for a sample of 17
West African countries over the period of 2009–2018 and document that ethical
behavior of firms is positively associated with foreign direct investments in these
countries.
 JOURNAL OF AFRICAN BUSINESS 5

3. Hypotheses development
3.1. Ethical behavior of firms and foreign direct investments
Foreign investors face high levels of information asymmetry compared to local investors
(Khlif, Ahmed., & Souissi, 2017). They generally face a ‘home bias’ in hosting countries.
Ethical principles may play a crucial role ethical in reducing home bias and attracting
foreign direct investment inflows in developing economies (Agyemang et al., 2019).
When host firm’s management tends to satisfy all stakeholders needs and follows an
adequate strategy when dealing with social and environmental issues, foreign investors
will be incentivized to invest in this type of firms in host country for the following
reasons. On the one hand, the legitimacy signal sent through the followed ethical
behavior of the host firm may help to build its organizational reputation that serves as
a meaningful signal that mitigates uncertainty and information asymmetry among
foreign investors (Lee et al., 2022). On the other hand, when meeting expectations
from various stakeholders, ethical behavior of firm may reduce future litigation risks
and costs and increase the acceptability of firm’s products or services among customers in
the host country leading to higher profitability (Lee et al., 2022).
Settings characterized by high levels of ethical behavior of firms in their
economies pursue fair and equal strategies with diverse types of stakeholders.
This will translate into more attractiveness of foreign investors who will have
more incentives to invest in emerging countries as high levels of ethical norms
may signal to them that mutual trust and transparency are core principles of local
businesses (Bardy et al., 2012). This implies that an economy’s attractiveness to
foreign investors depends on its ability to ensure that local firms are committed
to ethic-oriented business practices. Accordingly, business ethic standards prevail­
ing in one country represent a gateway to enhance foreign direct investment
inflows represent if an economy wishes to attract foreign direct investment
(Kasser & Sheldon, 2009).
By contrast, firms adopting unethical behaviors through, for example, the
under-payment or the over-exploitation of employees put themselves into discre­
dit and become the target of diverse types of stakeholders (e.g. the community
activists and other non-governmental agencies). This may translate into conflicts
between trade unions and firms top management leading to strikes and produc­
tion disruption. This implies that countries characterized by low ethical behavior
of firms will be less attractive for foreign direct investments as foreign investors
will expect problems with trade unions and strikes and high level of litigation
risks.
As noted above, Agyemang et al. (2019) and Appiah-Kubi et al. (2020) have
documented that ethical behavior of firms has a significant positive effect on
foreign direct investments in African settings. Therefore, the first hypothesis of
our study is formulated as follows.

H1: Ethical behavior of firms is positively and significantly association with foreign direct
investments within African settings.
6 I. KHELIL ET AL.

3.2. The moderating effect of judicial Independence on the association between

ethical behavior of firms and foreign direct investments
In emerging economies where the legal regulatory framework does not function
efficiently to prevent illegal activities and wrongdoings, foreign investors will not
invest (Voyer & Beamish, 2004). For instance, Drabek and Payne (2001, p. 8)
suggest that “the existence of strong legal provisions against bribery and their
effective enforcement will go a long way towards inducing FDI flows”.
Judicial independence represents a cornerstone to ensure equal treatment of all
stakeholders in front of rules. Kimbro (2002, p. 332) posit that “laws create
a structure in which acceptable and unacceptable behaviour is defined, and an
effective judiciary assures that anticorruption measures and penalties are enforced”.
Judicial independence may strengthen monitoring and punishment mechanisms
that discourage infractions by increasing the probability of penalty costs.
Even if foreign investors operate within an economic environment character­
ized by high level of business ethics, this will not represent an absolute assurance
that their investments are protected and they do not face a risk of expropriations
from local managers or investors. Judicial independence will play a pivotal role in
ensuring foreign investors about their rights and investments in case of litigious
affairs in hosting country. Judicial independence will increase foreign investors’
confidence in hosting country jurisdictional system and they will have assurance
that top managers of local firms will be held accountable in case of committing
infractions and they will not escape from legal suits and punishments through
bribes attributed to government officials.
Based on the above theoretical predictions, we expect that an economic envir­
onment characterized by business ethics will be more effective in attracting
foreign direct investments under high judicial independence. Thus, the following
hypothesis is formulated:

(+) H1 Foreign direct investment

Ethical behaviour

of firms (Ln FDI)

Moderating
effect
H2

Judicial independence

(JUDI)

Figure 1. Conceptual framework.

 JOURNAL OF AFRICAN BUSINESS 7

H2: The positive association between ethical behavior of firms and foreign direct
investments is more (less) pronounced in African countries characterized by high
(low) level of judicial independence.

Figure 1 illustrates the conceptual framework for the associations explored in this
paper.

4. Research design
Data for this study are collected from the Global Competitiveness reports and from the
World Development Indicator (WDI) database published by World Bank. Table 1 provides
details about the data used to measure the different variables and their various sources.

4.1. Sample
African continent includes 54 and the Global competitiveness reports (2014–2015; 2015–
2016; 2016–2017; 2017–2018) cover only 27 African countries. Therefore, the final
sample in our study includes 27 African countries over the period of 2014–2017 yielding
108 country-year observations. Table 2 displays more details about the sample selection
process and the list of African countries included in the sample.

Table 1. Data description and sources.

Variable Description
Ln fdi Natural logarithm of foreign direct investment inflows
data in current us dollars.
Ebof In your country, how would you rate the corporate ethics
of companies (ethical behavior in interactions with
public officials, politicians, and other firms)?
(1 = extremely poor – among the worst in the world;
7 = excellent – among the best in the world)
Judi Judicial independence is a measure on how in your
country, to what extent is the judiciary independent
from influences of members of government, citizens, or
firms? (1 = heavily influenced; 7 = entirely
independent)
Ln gdp Natural logarithm of gross domestic product per capita in
current us dollars
Sip Strength of investor protection index on a 0–10 (best)
Fcr Foreign currency regulations is an index ranging from 0 to
30.
Tr This indicator is a combination of profit tax (% of profits),
labor tax and contribution (% of profits), and other
taxes (% of profits)
Pi Policy instability in an index ranging from 0 to 30
Source
World development indicator (wdi) database
published by world bank
The global competiveness report 2014–2015;
2015–2016; 2016–2017; 2017–2018 (country
profiles)
The global competiveness report 2014–2015;
2015–2016; 2016–2017; 2017–2018 (country
profiles)
The global competiveness report 2014–2015;
2015–2016; 2016–2017; 2017–2018 (country
profiles)
The global competiveness report 2014–2015;
2015–2016; 2016–2017; 2017–2018 (country
profiles)
The global competiveness report 2014–2015;
2015–2016; 2016–2017; 2017–2018 (country
profiles)
The global competiveness report 2014–2015;
2015–2016; 2016–2017; 2017–2018 (country
profiles)
The global competiveness report 2014–2015;
2015–2016; 2016–2017; 2017–2018 (country
profiles)
8 I. KHELIL ET AL.

Table 2. Sample description.

Panel a: sample selection process
Number of African continent 54
Number of African countries included in the GCR 2014–2015; 2015–2016; 2016–2017; 27
2017–2018)
Final sample Minimum (54; 27) = 27
Panel B: List Of countries included in the study
1 Algeria 11 Madagascar 21 sierra leone

2 Botswana 12 Malawi 22 South Africa

3 Burundi 13 Mali 23 Tanzania

4 Chad 14 Mauritania 24 Tunisia

5 Egypt 15 Morocco 25 Uganda

6 Ethiopia 16 Mozambique 26 Zambia

7 Gambia, the 17 Namibia 27 Zimbabwe

8 Ghana 18 Nigeria

9 Kenya 19 Rwanda

10 Lesotho 20 Senegal

4.2. Dependent variable: foreign direct investments

Foreign direct investments are collected from the World Development Indicator (WDI)
database published by World Bank from 2014 to 2017. Following previous empirical
literature dealing with the determinants of foreign direct investments (e.g. Gordon et al.,
2012), we compute the natural logarithm of this variable. The minimum score is obtained for
Burundi with 10.923 in 2016 and the maximum score is for Egypt and it accounts 22.816 in
2016.

4.3. Test variable: the ethical behavior of firms

The score of ethical behavior of firms (EBOF) is scaled from “1” extremely poor level of
corporate ethics to “7” indicating an excellent level of corporate ethics of companies
(ethical behavior in interactions with public officials, politicians, and other firms). The
lowest score is obtained for Mauritania (2.400) in 2015, while the highest score is
observed for Rwanda (5.300) in 2016.

4.4. The moderating variable: judicial Independence

The judicial independence is measured using a survey conducted among senior managers of
companies to obtain experts’ opinions about how judicial systems in a country is independent
from influences of the government, individuals and firms (Global Competitiveness Reports,
2017–2018; 2016–2017; 2015–2016; 2014–2015). A survey is conducted among business
 JOURNAL OF AFRICAN BUSINESS 9

leaders who were asked to score the judicial independence on a scale ranging from “1”
indicating not independent at all to “7” indicating entirely independent. A weighted average
of the scale reported by the respondents in one country is then computed to get the judicial
independence score for each country included in the study. The minimum score is observed
for Burundi in 2015 and it accounts for (1.600) and the maximum score is registered for
South Africa in 2016 (5.800). The median score in the sample amounts to 3.700%.

4.5. Control variables

We consider five control variables including the Gross Domestic Product per capita, the
level of investor protection, the foreign currency regulations, the tax rate and the policy
instability. First, we control the level of economic growth by the gross domestic product
per capita since it has been previously documented that gross domestic product is
positively related to foreign direct investments (Encinas-Ferrer & Villegas-Zermeño,
2015). Second, the level of investor protection is one of the important determinants of
international investments (Cyrus, Iscan, & Starky, 2006). Therefore, the investor protec­
tion can influence the foreign direct investment inflows in one country (Brada et al.,
2020). Third, the foreign currency regulations may influence the level of foreign direct
investments in one country. A weaker currency regulation in one country attracts less
foreign investments. For instance, Grosse and Trevino (2005) document a significant
negative association between the exchange rate and foreign direct investment inflows in
transitional economies. Fourth, the tax rate can affect foreign direct investment as foreign
investors may prefer countries with lower tax rates (Cassou, 1997). Finally, policy
instability may affect negatively foreign direct investments as foreign investors may
perceive economic transition and political instability as a source of risk that may increase
home bias and information asymmetry (Brada, Kutan, & Yigit, 2003).

4.6. Models specification

To test the empirical validity of the hypotheses formulated above, we conduct a balanced
panel data analysis. The following regression model is performed:
LnFDIit ¼ α0 þ α1 EBOFit þ α2 JUDIit þ α3 LnGDPit þ α4 SIPit þ α5 FCRit þ α6 TRit
þα7 PIit þ εit (1)
Where:
Dependent variable:
LnFDI ¼ The natural logarithm of foreign direct investment inflows
Independent variable:
EBOF ¼ The ethical behaviour of firms score
Moderating variable:
JUDI ¼ The judicial independence score
Control variables:
10 I. KHELIL ET AL.

LnGDP ¼ The natural logarithm of gross domestic product per capita

SIP ¼ The Strength of investor protection score

FCR ¼ The foreign currency regulations score

TR ¼ The tax rate score

PI ¼ The policy instability score:

4.7. The moderating effect of judicial Independence on the relationship between

ethical behavior of firms and foreign direct investment
To test for the moderating effect of judicial independence on the association between the
ethical behavior of firms and foreign direct investment, we consider two sub-samples: (i)
low judicial independence (inferior or equal to the median of JUDI) and (ii) high judicial
independence (above the median). H2 consists of observing a positive association
between ethical behavior of firms and foreign direct investments only for countries
characterized by high level of judicial independence. Accordingly, the model 2 is per­
formed to test H2.
LnFDIit ¼ α0 þ α1 EBOFit þ α2 LnGDPit þ α3 SIPit þ α4 FCRit þ α5 TRit þ α6 PIit þ εit

(2)

5. Empirical results
5.1. Descriptive statistics
Table 3 displays descriptive statistics for all variables included in the model. Foreign
direct investment has an average score of 20.096 and a range from 10.923 to 22.816.
ethical behavior of firms has a mean of 3.708 and ranges from 2.400 to 5.300. Judicial

Table 3. Descriptive statistics.

Variables Observations Mean Standard deviation Minimum Maximum
Ln Fdi 108 20.096 1.913 10.923 22.816
Ebof 108 3.708 0.558 2.400 5.300
Judi 108 3.637 0.932 1.600 5.800
Ln gdp 108 7.149 0.919 5.407 8.923
Sip 108 4.891 0.965 2.700 8.000
Fcr 108 4.747 4.265 0.000 17.600
Tr 108 8.325 4.906 0.200 19.700
Pi 108 6.711 5.776 0.000 24.600
ln FDI: the natural logarithm of foreign direct investment inflow score; EBOF: the ethical behavior of firms; JUDI: the
judicial independence score; ln GDP: the natural logarithm of gross domestic product per capita in one country; SIP: the
level of investor protection in one country; FCR: the foreign currency regulation score; TR: the tax rate score; PI: policy
instability score.
*significant at 10%; **significant at 5%; ***significant at 1%.
 JOURNAL OF AFRICAN BUSINESS 11

Table 4. Correlation matrix.

Ln Fdi EBOF JUDI Ln GDP SIP FCR TR PI
Ln FDI 1
EBOF 0.410*** 1
JUDI 0.242** 0.819*** 1
Ln GDP 0.431*** 0.284** 0.507*** 1
SIP 0.240** 0.247** 0.312*** 0.309*** 1
FCR −0.065 −0.022 0.015 −0.175* −0.135* 1
TR −0.145* −0.080 −0.008 −0.360*** −0.242** 0.120* 1
PI −0.043 −0.302*** −0.290** −0.071 0.1060* −0.007 −0.409*** 1
ln FDI: the natural logarithm of foreign direct investment inflow score; EBOF: the ethical behavior of firms; JUDI: the
judicial independence score; Ln GDP: the natural logarithm of gross domestic product per capita in one country; SIP: the
level of investor protection in one country; FCR: the foreign currency regulation score; TR: the tax rate score; pi: policy
instability score.
*significant at 10%; **significant at 5%; ***significant at 1%.

independence has an average of 3.637 and ranges from 1.600 to 5.800. GDP per capita has
a mean of 7.149 and varies from 5.407 to 8.923. The mean of the strength of investor
protection variable accounts for 4.891 and ranges from 2.700 to 8.000. Finally, the means
of foreign currency regulation, tax rate and policy instability account for 4.747, 8.325 and
35.776 respectively. Table 3 reports more details about descriptive statistics of all vari­
ables examined in this study.

5.2. Univariate analysis

Table 4 reports the results of univariate analysis. Findings show that there is
a significant positive relationship between ethical behavior of firms and foreign direct
investments in African settings with a Pearson correlation coefficient accounting for
(0.410), and this result provides preliminary support for H1. Similarly, judicial inde­
pendence is positively and significantly correlated with the foreign direct investments
(0.242). Gross domestic product per capita and the strength of investor protection are
positively and significantly correlated with foreign direct investments with Pearson
coefficients amounting to 0.431 and 0.240 respectively. The remaining control variables
(foreign currency regulation, tax rate and policy instability) are negatively correlated
with foreign direct investments.

5.3. Multivariate analyses

Table 5 presents the results of multiple regression specified in model (1). In model 1, the
findings show that ethical behavior of firms is positively and significantly associated with
the foreign direct investments (Coeff = 2.030; t= 3.350). This result provides support for
H1 and implies that that ethical behavior may influence the foreign direct investment
inflows in African settings. Our findings corroborate results reported by Agyemang et al.
(2019) who also examine the same association in African countries for a previous period.
Our results are also in line with those reported Appiah-Kubi et al. (2020) who have
examined the same relationship for a sample of 17 West African countries. These
findings imply that African countries characterized by high levels of ethical behavior of
firms have more attractiveness to foreign investors who will have incentives to invest in
12 I. KHELIL ET AL.

Table 5. Multivariate regression analyses.

Dependent variable: Ln FDI

Model 2
Model 1 (overall sample) Low JUDI High JUDI
Coeff t-statistic Coeff t-statistic Coeff t-statistic
Intercept 17.846 7.550*** 13.670 3.830*** 13.366 5.860***
EBOF 2.030 3.350*** 0.251 0.360 0.764 1.860**
JUDI 1.185 2.890***
Ln GDP 0.659 2.760*** 0.959 2.550** 0.626 2.830***
SIP 0.228 1.220 0.432 1.430 0.586 3.010***
FCR 0.002 0.050 −0.117 −1.700* 0.001 0.040
TR 0.048 1.120 −0.133 −1.700* 0.124 2.620
PI 0.012 0.360 −0.125 −2.300*** 0.137 3.360***
2014 - - −0.663 −0.78 0.856 1.580
2015 −0.672 −1.400 −0.701 −0.910 0.765 1.600
2016 −1.430 −2.750 −1.009 −1.360 0.473 1.010
2017 −1.337 −2.470 - - - -
F (p-value) 4.170*** (0.000) 3.090*** (0.000) 4.810*** (0.000)
Adj-Rsquare 22.86 24.86 41.140
Max vif 5.54 2.40 2.34
Number of 108 58 50
Observations
Ln FDI: the natural logarithm of foreign direct investment inflow score; EBOF: the ethical behavior of firms; JUDI: the
judicial independence score; Ln GDP: the natural logarithm of gross domestic product per capita in one country; SIP: the
level of investor protection in one country; FCR: the foreign currency regulation score; TR: the tax rate score; PI: policy
instability score.
*significant at 10%; **significant at 5%; ***significant at 1%.

these emerging countries as high levels of ethical norms may reduce home bias and signal
to them that mutual trust and transparency are core principles of local businesses. These
findings confirm also the predictions of product life cycle and Eclectic theories suggesting
that favorable conditions prevailing in a host country may increase the chance of this
setting to receive high levels of foreign direct inflows. More specifically, our findings
emphasize the importance of business ethics as a key factor that may to reassure foreign
investors about the business climate prevailing in a given country and enhance foreign
direct investments. Accordingly, foreign investors will have more incentives to invest in
countries characterized by high ethical behavior of firms since managements are more
interested to build and maintain organization reputation and meet various stakeholders’
expectations. By doing so, firms operating in countries characterized by high ethical
behavior will reduce the propensity of future litigation risks and costs for foreign
investors in host country and increase the acceptability of firm’s products or services
among customers leading to higher profitability for foreign investment inflows.
Judicial independence is also positively and significantly associated with the foreign
direct investments (Coeff = 1.185; t= 2.890). This implies that African countries char­
acterized by high judicial independence increases foreign investors’ confidence in hosting
country jurisdictional system leading to more foreign direct investments in these settings.
For control variables, the gross domestic product per capita is positively and signifi­
cantly associated with foreign direct investment (Coeff = 0.659; t= 2.760), while the
strength of investor protection, the foreign currency regulation, the tax rate and the
policy instability are insignificantly associated with foreign direct investments.
Controlling for muticollinearity, the VIFs reported suggest that model 1 does not
suffer from such a problem since the maximum VIF amounts to 5.540.1 The overall
 JOURNAL OF AFRICAN BUSINESS 13

explanatory power of model l is significantly high (F = 4.170; p< 0.000) and the Adjusted-
Rsquare accounts for 22.86%.
In order to examine the moderating effect of judicial independence on the association
ethical behavior of firms and foreign direct investments (H2), we divide our sample into
two groups (high versus low judicial independence countries). The results reported in
models 2 show a significant positive association between ethical behavior of firms and
foreign direct investments under high judicial independence environments
(Coeff = 0.764; t = 1.860), while this relationship becomes insignificant for African
countries characterized by low judicial independence (Coeff = 0.251; t = 0.360). Thus,
H2 is supported and judicial independence represents a significant moderator of the
association between the ethical behavior of firms and foreign direct investments. This
implies that the high level of compliance with business ethics by firms in African setting
will be more effective in attracting foreign direct investments under high judicial
independence. Our findings emphasize the need to consider judicial independence in
combination with strong ethical norms to stimulate foreign direct investments in African
countries. Our findings confirm that judicial independence represents the only guarantee
for foreign investors to preserve their rights in case of litigious affairs in hosting country
and it increases foreign investors’ confidence in hosting country jurisdictional system.
For the control variables in model 2, policy instability is positively and significantly
associated with foreign direct investments under high level of judicial independence
(Coeff = 0.137; t = 3.360), while it becomes negatively and significantly associated with the
same variable under low level of judicial independence (Coeff = −0.125; t = −2.300). This
implies that high level of judicial independence through strict application of laws may
stimulate foreign direct investments even with high level of political instability in African
environment. Similarly, the strength of investor protection and gross domestic product per
capita are positively and significantly associated with foreign direct investments for high level
of judicial independence sub-sample. It should be noted here that the explanatory power of
model 2 (high judicial independence) has witnessed a significant improvement moving from
22.860 (model 1) per cent to 41.140%.
It should be noted that model 2 do not suffer from this problem since all maximum VIFs
account for 2.400 in model 2 (low judicial independence) and 2.340 in model 2 (high judicial
independence).
Based on the above empirical results, the following recommendations are proposed. On the
one hand, African governments should pursue more pragmatic policies in adopting codes of
ethical conducts that highlight the importance of ethics in the business world and propose
guides for best practices. On the other hand, African governments should adopt guidelines to
promote judicial independence from domination of the elite, the military and political parties.
By doing so, foreign investors will be reassured about their rights and investments in case of
litigious affairs in hosting country and this may increase foreign investors’ confidence in
hosting country jurisdictional system.

6. Conclusion
The aim of this paper is to investigate the relationship between ethical behavior of firms and
foreign direct investments and test whether judicial independence moderates this relationship
within African countries. Using a sample of 108 country-year observations over the period of
14 I. KHELIL ET AL.

2014–2017, we document that ethical behavior of firms is positively associated with foreign
direct investments and this positive and significant association remains stable and significant
only for African countries characterized by high judicial independence.
These results imply that African economies characterized by firms that adhere to ethical
norms and comply with responsible business practices are considered as valuable assets that
attract more foreign direct investment inflows. Furthermore, judicial independence in com­
bination with business ethics increases foreign investors’ confidence in the jurisdictional
system of hosting country.
These empirical findings have policy implications for African settings as they highlight the
importance of enforcing ethical standards and strengthening judicial independence through
adopting various key strategies. These include: (i) the adoption of codes of ethical conducts,
(ii) the promoting of transparency with respect to resource allocation and (iii) the strict
enforcement of rules that impose sanctions on corrupt practices and unethical behaviors. By
doing so, African countries may reduce home bias generally faced by foreign investors in
hosting countries and enhance foreign direct investment inflows.
Our study may suffer from some limitations. On the one hand, some variables used in
this study are proxied using survey data measures which may raise concerns about
measurement errors (Richardson, 2006). However, data are collected from reliable
sources (e.g. the Global Competiveness reports). On the other hand, because of data
unavailability, our study was limited to 27 African countries, which reduces the general­
ization power of our findings to other African economies that were not incorporated in
this empirical enquiry. However, since most African settings share similarities in terms of
economic features, our findings can be generalized to other African countries excluded
from the analysis due to data unavailability.
Future research enquiries should may extend this stream of research by examining the
effect of national culture dimensions (e.g. uncertainty avoidance, long-term orientation and
individualism) on foreign direct investments in African settings.

Note
1 Multicollinearity exists when the vif exceeds 10 (Neter, Wasserman and Kutner, 1989).

Acknowledgements
The authors are grateful for the helpful comments of the two anonymous reviewers and the editor.
The authors would like to thank Prince Sultan University for their support.

Disclosure statement
No potential conflict of interest was reported by the author(s).

ORCID
Hichem Khlif http://orcid.org/0000-0002-1807-242X
 JOURNAL OF AFRICAN BUSINESS 15

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