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Human Capital Development, War and Foreign Direct Investment in Sub-Saharan Africa

2009; Taylor & Francis; Volume: 37; Issue: 1 Linguagem: Inglês

10.1080/13600810802660828

1469-9966

Adil H. Suliman, André Varella Mollick,

Economic Growth and Development

Abstract The authors use a panel data fixed effect model to identify the determinants of foreign direct investment (FDI) for a large sample of 29 sub-Saharan African countries from 1980 to 2003. They test whether human capital development, defined by either literacy rates or economic freedom, and the incidence of war affect FDI flows to these countries. Combining these explanatory variables to several widely used control variables, it was found that the literacy rate (human capital), freedom (political rights and civil rights) and the incidence of war are important FDI determinants. The results confirm our expected signs: FDI inflows respond positively to the literacy rate and to improvements in political rights and civil liberties; war events, by contrast, exert strong negative effects on FDI. For robustness, the model is estimated for religious groupings of sub-Saharan African countries. Notes The authors would like to thank an anonymous referee for helpful comments on a previous version of this article. The usual disclaimer applies. 1 Kravis (Citation1988) and Lucas (Citation1990) indicate that the quality of human capital—the skill and educational level of labor—influence both the volume of FDI inflows and the activities of a multinational firm in developing countries. Mody et al. (Citation1999) emphasize the preference of foreign investors for developed human capital as well as their perception of labor quality as key determinants in attracting foreign investors. Miyamoto (Citation2003) states that developing host countries need a minimum of basic schooling for their adult population to demonstrate that they have sound investment climates for potential transnational corporations. Ake (Citation1996) argues that political conditions in Africa are the greatest impediment to development and constitute the major factor behind the performance of recent years. Harms & Ursprung (Citation2002) show empirically that multinational enterprises appear to be attracted by countries in which civil and political freedoms are respected. 2 According to UNESCO (Citation2006), literacy rates are extremely low in countries such as Benin, Burkina Faso, Chad, Mali, Mozambique, Niger, Senegal and Sierra Leone, and the rates are relatively higher in countries such as Congo, Equatorial Guinea, Lesotho, Mauritius and Namibia. 3 Quasi-liquid liabilities are the sum of currency and deposits in the central bank (M0) plus time and savings deposits, foreign currency transferable deposits, certificates of deposit and securities repurchase agreements, travellers' cheques, foreign currency time deposits, commercial papers, and shares of mutual funds or market funds held by residents. 4 First, as most of the countries have a high percentage of their foreign inflows directed to primary commodities, it is crucial to look at many exporting commodities when one tries to measure natural resources. A classification table, available from the authors, specifies the degree of major exports in all countries included in the estimations. Second, given limitations on the availability of data to measure the primary commodity goods exported with respect to FDI for many countries in our sample, we consider factors that might impact the supply of these commodities, including war and political instability. We try to minimize the impact of the movement of these commodities on GDP by using the GDP per capita based on purchasing power parity (PPP), which helps control for the distortions due to anomalies of the exchange rate or prices such as the impact of non-tradable goods and services, tariffs and taxes. Third, movements in the economies of most sub-Saharan African countries come through income and output changes, not through interest rate or capital movements, as discussed by Deaton (Citation1999), Collier & Dehn (Citation2001) and UNCTD (Citation2005). Therefore, not only the presence of natural resources but also their production stability may impact FDI inflows. Finally, we look at the UNCTAD inward FDI Performance Index, which measures diversion of FDI from other parts of the world to Africa. This index standardizes a country's FDI inflows to the size of its economy. It measures the ratio of a country's share in global FDI flows to its share in global GDP. It is calculated for two periods spanning the past decade for Africa: 1988–90 and 1998–2000. Africa's score fell from 0.8 during 1988–90 to 0.5 during 1998–2000, indicating that these countries lost their attractiveness during these periods despite their abundant natural resources. These factors suggest that the stock of natural resources is a biased indicator at best. 5 Muslim countries: Benin, Burkina Faso, Côte d'Ivoire, Cameroon, Comoros, Mali, Mozambique, Mauritania, Niger, Nigeria, Senegal, Chad, Togo and Uganda. 6 Non-Muslim countries: Burundi, Botswana, Central African Republic, Republic of the Congo, Ethiopia, Ghana, Kenya, Lesotho, Mauritius, Malawi, Rwanda, Swaziland, South Africa, Zambia and Zimbabwe. 7 For example: the Cameroon–Nigeria conflict, which started in 1994 over fishing settlements on the Bakassi Peninsula; in Chad, the military conflict between the regime in power and armed opposition groups, which continued between 1989 and 2003, and intensified after the discovery of oil; the conflict that erupted over natural resources in the western region of Sudan–Darfur in the 1980s and intensified in the 1990s.