Demand Side Factors Affecting the Inflow of Foreign Direct Investment to African Countries: Does Capital Market Matter?

  •  Zenegnaw Abiy Hailu    


This paper aims at providing empirical analysis of the demand side determinants of the inflow of Foreign Direct
Investment to African nations, with particular emphasis on stock market availability. Due to data heterogeneity,
non-continuity and because the Hausman test favors it, cross section fixed effect Least Square Dummy Variable
(LSDV) estimation technique is used. Natural resource, labor quality, trade openness, market accession and
infrastructure condition are found to have positive and significant effect. Availability of stock market has the
expected positive but insignificant effect. In search of possible explanation governments’ expenditure and
private domestic investment are added to the regression equation and are found to have positive effect, ruling out
the possibility of crowding out effect. Stock markets in Africa are not structured in such a way that they can
contribute to attract FDI and hence policy makers should restructure capital markets to get the most out of them.
The bottom line is, policy makers of those countries have a lot of demand side instruments under their discretion
to attract FDI inflow.

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