Profiling sectoral risks of foreign direct investment in Africa

Abstract

Attracting foreign direct investment (FDI) is of utmost importance for African countries in order to create employment opportunities, reduce poverty and to ensure sustainable economic growth. Despite Africa’s exceptional FDI performance during the past decade, the majority of FDI inflows have been directed to a few selected countries. As investors face many risks when investing in developing countries it is argued that risk perception plays a vital role in the FDI inflows into Africa. This thesis focuses on the relationship between risk and FDI. A structural equation model is used to analyse this relationship with a dataset of ten risk categories and FDI data from 42 African countries. The importance of SEM for this study lies in the capability of modelling data from multiple groups. Hence, the four sectors used comprise metals, automotive, communications and the real estate sector. Overall results indicate that government effectiveness and legal and regulatory risks produce the biggest concern for investors. The conclusion is that there are different risk patterns regarding FDI in Africa. The empirical results further imply that if African countries wish to attract the levels of FDI required to stimulate economic growth, policies are needed to reduce risks in order to create a favourable investment climate for investors.