Institutional quality as a catalyst for structural transformation in African countries: What role does foreign direct investment play?

Abstract

The socio-economic development of African countries is strongly influenced by the impact of foreign direct investment (FDI) flows and the quality of these countries' institutions. This paper examines the role played by the quality of these countries' institutions as a pillar in the process of structural transformation (ST) in African countries considering the relationship between FDI and institutional quality. This led to the completion of a thorough econometric analysis that estimated two Panel Auto Regressive Distributed Lag (ARDL) models and concentrated on the complex relationships between the study's variables. The econometric results obtained showed a negative and significant effect of FDI on the quality of institutions in the long term as reflected by two dependent variables: the degree of freedom from corruption and the degree of freedom of ownership. Thus, the results show the major constraints African countries faced in terms of property rights, corruption and the implementation of good governance practices, underscoring the need for radical institutional reform to foster these crucial dimensions of socio-economic functioning. In addition, the study’s result demonstrated the crucial role that institutional quality within the African continent can play in the success of its ST process. Indeed, the positive impact of institutional quality on FDI attractiveness and the implementation of effective development policies could foster an environment conducive to achieve inclusive growth. Finally, the results of the study can help decision-makers define the policies essential to the success of the ST process in African countries.