Economic Institutions, Political Institutions and Foreign Direct Investment Inflows Into Sub-Saharan Africa: A Hierarchy of Institutions Perspective

Abstract

This paper tests the hierarchy of institutions hypothesis for Foreign Direct Investment inflows to sub-Saharan African economies, i.e., the role of political institutions in the relationship between economic institutions and foreign direct investment inflows to sub-Saharan African economies. The paper employs evidence on a panel data of 38 SSA economies spanning the years 2000 to 2021. By employing a dynamic model, the results of the study were estimated using the System Generalized Method of Moments estimator. Generally, the findings show that economic institutions indicators positively contribute to foreign direct investment inflows to SSA economies. Further evidence suggests that political institutions positively moderate the relationship between economic institutions and foreign direct investment inflows. The results are robust based on alternative measures of political institutions. The results sanction the relevance of policies aimed at strengthening both economic institutions and political institutions, which represents a key channel through which FDI inflows to SSA economies can be improved.