Impact of foreign direct investment on the governance of West African countries

Abstract

Developing countries, particularly in Africa, see the role of foreign direct investment as important for their socio-economic development. There is a global consensus on the importance of good governance as a catalyst for foreign direct investment (FDI) and the expansion of a country’s economy. However, it is essential to recognise that FDI can also have an impact on host country policies and institutions. The general objective of this article is to analyze the effect of foreign direct investment on the quality of governance in West African countries. The analysis in the context of West African countries is relevant since these countries have been experiencing for several decades a situation of intentional instability reflecting poor governance. Also, there is a decline in FDI inflows in the subregion. The empirical evidence is based on an econometric model of panel standard corrected errors (PCSE) for a panel of 13 West African countries between 2000 and 2021. Our study used principal component analysis (PCA) to design four governance indicators (economic governance, institutional governance, political governance and global governance). Our results indicate that FDI has no significant effect on these governance indicators. These results suggest that the scale and diversity of FDI, and its sources, play a crucial role. In conclusion, this study examines the practical and theoretical implications of our research and suggests potential avenues for further research.

Keywords: FDI, governance, West Africa, PCSE.

Classification JEL: F23, O43

Paper type: Empirical Research