therolesofexchangerateuncertainty,.docVIP

THE ROLES OF EXCHANGE RATE UNCERTAINTY, POLITICAL RISK AND HOST COUNTRY INSTITUTIONS ON FOREIGN DIRECT INVESTMENT (FDI) INTO AFRICA Blen Solomon* Grand Valley State University ABSTRACT This study, examines the roles of macroeconomic uncertainty, political risk, as well as host country institutions, in affecting FDI inflows into African economies. The past few decades have witnessed a surge of FDI inflows to developing regions. However, FDI inflows to Africa still remain small when compared to other developing regions. What characteristics does Africa exhibit that deter FDI inflows into the region? Investor surveys show political instability, corruption and macroeconomic uncertainty to be strong deterrents of FDI inflows to Africa. However, there are very few studies in the literature that investigate rigorously the impact of macroeconomic uncertainty and political risk, as well as the role of host country institutions for FDI inflows into African economies. I Use a sample of 11 African countries, and employ Fixed Effect and Arellano-Bond GMM estimators. The most important finding is that macroeconomic uncertainty (captured by conditional variances obtained from GARCH models) and the poor quality of host country institutions (proxied by corruption) are deterrents of FDI inflows into these economies. However, political risk (proxied by internal and external conflicts) does not significantly affect FDI inflows into Africa economies. Key Words: FDI, Macroeconomic Uncertainty, Political Risk, African EconomiesJEL Classification: F21, F23, O24, O55 1. INTRODUCTION Foreign direct investment (FDI) has become a key element of the global economy. Because of its long-term nature, FDI has the potential to generate employment, raise productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development of the world’s developing countries (UNCTAD, 2004). In addition, FDI is considered less prone to crisis as opposed to