Determinants of foreign direct investment in sub-Saharan Africa, with inferences on Kenya

Abstract

Foreign Direct Investment (FDI) is an important source of capital jar African countries where massive capital amounts are needed to finance development. FDI inflows into Africa have remained stable throughout the I990s, despite the increase in global volume. The African share of global FDJ inflows remained at the low level of2.3% ill 1997,1.2 % in 1998 and also 1.2% ill 1999. This paper analyses the determinants of FDJ ill Sub- Saharan Africa, in an attempt to explain the low levels of FDI in the region despite the increase in global volume. Using a sample of 20 Sub-Saharan African countries over the ; . period 1990 to 1999, the empirical results show that real GDP growth rate, taxation policy and the degree of openness of an economy significantly determine FDI in these countries. While real GDP growth rate encourages FDJ, taxation policy and degree of openness of an economy were found to deter FDJ. Further inference on Kenya show that the model actually explains the declining net FDI inflows into the country, mainly due to the taxation and liberalisation policies pursued by the government. Therefore, sound taxation policies, steady economic growth and control of feedback effects of opening up an economy would increase FDI inflows into Sub-Saharan Africa.