Analysis of corruption and foreign direct investment in Africa

Abstract

This research seeks to formulate a theory relating FDI and corruption and empirically assess the aptness of this theory. This research seeks not only to establish that in general corruption has a negative impact on FDI inflow to Africa but also to show that there is a threshold referred to as the Corruption Tolerable Level of Investment (CTLI), below which corruption is expected to have a positive impact on FDI inflow to Africa. This research also seeks to deploy data on actual corruption to establish that corruption has a negative impact on foreign ownership of firms in Africa. Secondary data from the World Development Indicators (WDI DATABANK) 2012 was used to assess the impact of corruption on FDI in Africa. The source of data for analyzing the effects of corruption on foreign ownership of firms in Africa is the World Business Environment Survey (WBES) conducted by the World Bank. In order to meet the objectives of the study, the dynamic panel data estimation technique as well as the Tobit and probit estimation techniques were deployed. The estimated Corruption Tolerable Level of Investment (CTLI) in Africa is -0.27 on the control of corruption scale which ranges from approximately -2.5 (weak) to 2.5 (strong). The findings also indicate that the percentage of total annual sales of the firm paid as informal payments to the public officials has a negative and highly significant impact on foreign ownership of firms in Africa. Therefore African governments should institute policies to control corruption in the public sector in order to enhance the country’s performance on the control of corruption index. This will boost foreign investors’ confidence in their economies.