Relationship Analysis Between FDI and Economic Growth in African Countries: Does Governance Quality Matter?

The present study contributes to the previous literature by analyzing the nonlinear empirical linkage between the foreign direct investment and economic growth in the presence of governance quality. The main objective of this paper is to determine the threshold level of governance quality, which, once attained, will induce the positive impact of foreign direct investment on economic growth. In order to explore the non-linear triangular relationship among these three macroeconomic variables, this study applies a dynamic threshold panel data framework and considers global governance index as the threshold variable. The dataset is a balanced panel of fifty-four African countries considered over 1996 and 2021. We have showed that there is a non-linearity between growth and foreign direct investment depending on the level of governance quality. It was proved too that the positive effect of foreign direct investment begins to manifest itself once governance quality reaches some threshold level, which turns out to be above the levels of governance quality of most African countries. Later, we use the dynamic panel methodology to study the role of governance indicators as determinants of FDI inflows. Our findings reveal that not all indicators of governance quality have a significant effect on foreign investors’ decisions in African countries. In light of obtained results, policy implications are discussed.