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How do Liberalization, Institutions and Human Capital Development affect the Nexus between Domestic Private Investment and Foreign Direct Investment? Evidence from Sub-Saharan Africa

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  • John Mayanja Bbale

    (Department of Policy and Development Economics, School of Economics, College of Business and Management Sciences, Makerere University, Pool Road, P.O Box 7062, Kampala, Uganda)

  • John Bosco Nnyanzi

    (Department of Economic Theory and Analysis, School of Economics, College of Business and Management Sciences, Makerere University, Pool Road, P.O Box 7062, Kampala, Uganda)

Abstract

Developing countries have continued to experience an unprecedented increase in direct foreign investment (FDI) inflows for the past two decades. However, the quantitative impact of the same on private domestic investment (PDI) is still imprecise. Using a system GMM approach and panel data from Sub-Saharan Africa (SSA) for the period 1996–2013, we provide evidence in support of the crowding out role of FDI on PDI but the observed nexus is precipitated by the presence of liberalization, human capital development and institutional quality. Interestingly, when we consider the latter variables uninteracted, the improvement of each appears to significantly benefit PDI. In addition, the substitution role of FDI in PDI appears to be stronger in resource-rich than in the resource-poor countries. Additionally, we find that public investment crowds out private investment whereas infrastructure development, past private investment, credit depth, and GDP per capita are supportive of the PDI. However, we document mixed evidence for sub-samples of the East African Community, the Southern Africa Development Corporation, the Economic Community and West African States, and the Economic Community of Central African States. Overall, our study underscores the urgent need for well-directed policies in line with improving institutions, school enrolment, financial systems, infrastructure, and the government prioritization of productive investment that is supportive of the private as well as foreign sector. We advocate for reviews of incentive packages to foreign firms that discourage fair competition if the PDI-FDI complementarity and consequential positive spillovers to other sectors are to be realized for economic development in SSA.

Suggested Citation

  • John Mayanja Bbale & John Bosco Nnyanzi, 2016. "How do Liberalization, Institutions and Human Capital Development affect the Nexus between Domestic Private Investment and Foreign Direct Investment? Evidence from Sub-Saharan Africa," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 16(3), pages 569-598, September.
    • Handle: RePEc:wsi:gejxxx:v:16:y:2016:i:03:n:gej-2015-0057
    DOI: 10.1515/GEJ-2015-0057
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    Cited by:

    1. Gibogwe, Vincent & Nigo, Ayine & Kufuor, Karen, 2022. "FDI and economic growth in SADC region," MPRA Paper 115029, University Library of Munich, Germany, revised 29 Sep 2022.
    2. John Bosco Nnyanzi & Susan Kavuma & John Sseruyange & Aisha Nanyiti, 2022. "The manufacturing output effects of infrastructure development, liberalization and governance: evidence from Sub-Saharan Africa," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(2), pages 369-400, June.

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