Does foreign direct investment promote access to basic services? The case of drinking water in Africa

Abstract

Addressing the challenge of limited access to drinking water requires a comprehensive understanding of its underlying causes. This study aims to evaluate the effect of foreign direct investment (FDI) on access to basic services in Africa, focusing specifically on people's access to drinking water. Utilizing data from a panel of 51 countries spanning the period 2000–2020, we employed a two-step system generalized method of moments to estimate dynamic econometric models. Our analysis reveals a positive correlation between FDI inflows and improved access to drinking water. A one-percentage point increase in FDI inflows leads to a 0.026 percentage point rise in the proportion of people with access to drinking water. Notably, the effects vary between urban and rural areas, with marginal effects of 0.022 and 0.160, respectively. Furthermore, our findings indicate an inverse U-shaped relationship between FDI and access to drinking water in Africa, signifying that while access to drinking water improves with increasing FDI, the rate of improvement diminishes. The study recommends the judicious utilization of tax revenues from multinational enterprises to fund basic service infrastructures and advocates for measures aimed at attracting additional FDIs.