Foreign Direct Investment and Export Diversification in Africa: The Role of Institutional Quality
Loading...
Date
2026-02
Authors
GOLO Yao Nukunu
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
This article analyses the role of institutional quality in host countries in facilitating the effect of Foreign Direct Investment (FDI) on export diversification in Africa. The analysis is based on the idea that the mixed results of existing empirical studies may be due to institutional heterogeneity and posits that improving institutional quality can intensify the benefits associated with FDI, with varying impacts across countries and/or over time.
To achieve this objective, we used a two-step linear panel and a dynamic panel with interaction terms on a sample of 30 African countries covering the period 1996-2019. The sample is subdivided into subgroups according to their natural resource endowment.
The results show that FDI has a positive effect on export diversification in mineral-rich and oil-producing countries. These results contradict the predictions of Asiedu and Lien (2011) and Gylfason and Zoega (2006), who argue that FDI should create either a crowding-out effect on investment in the natural resource sector and/or favourable wage differentials in the natural resource sectors, resulting in a concentration of exports in these sectors. Similarly, the quality of institutions has a direct negative effect on export diversification, partly confirming the literature that, with an abundance of strategic natural resources (such as oil), the quality of institutions is no longer an indicator of FDI attractiveness (Asiedu, 2013, Aleksynska and Havrylchyk, 2012, and Feulefack and Ngassam, 2020). On the other hand, the indirect effect of institutional quality on export diversification through FDI is positive. Countries that improve their institutions can attract more investment and strengthen their international competitiveness, which can lead to greater export diversification . Given that the quality of institutions still needs to be improved in African economies, they are unable to attract sufficient FDI to promote the diversification of their exports. Under these circumstances, it is imperative that African countries create an institutional environment that attracts sufficient FDI in order to diversify their exports