The purpose of this paper is to investigate the effect of governance indicators (political stability, control of corruption, rule of law, regularity quality, voice and accountability and government effectiveness) on foreign direct investment (FDI) flows to African countries.
The authors employed a panel regression model on data from 50 African countries for the period 1996 to 2010. The empirical analysis uses the fixed and random effects estimation.
The results obtained through fixed and random effects indicate that out of the six World Bank's governance indicators, three are statistically significant. These are voice and accountability, government effectiveness and rule of law. This result implies that to improve their investment climate and increase the inflow of FDI, African countries need to improve the state of governance.
The major limitation of this paper is the absence of different sources for governance indicators, and absence of long time series data on some other governance indicators such as transparency.
These results lead to the conclusion that some governance indicators are very important for foreign investors in their investment decisions, while other indicators are not. Governments have to consider these indicators while trying to attract foreign investment.
