Volatile Energy, Stunted Investment: How Energy Price Inflation Shapes Foreign Direct Investment Into Africa

Abstract

ABSTRACT In the study, we investigate the roles energy price inflation and its volatility play in shaping foreign direct investment (FDI) inflow into Sub‐Saharan Africa (SSA). Applying data from 37 SSA economies between 2002 and 2023 and the system generalized method of moments (GMM) as the estimation strategy to account for endogeneity, the results find that (1) a rise in energy price inflation significantly reduces the share of SSA's FDI in the world total, and (2) energy price inflation volatility negatively and significantly reduces the share of SSA's FDI in the world total and the share of FDI in gross domestic product. To attract greater FDI, SSA should expand on renewable energy utilization through incentives and public–private partnerships, while harmonizing regional energy policies via common pricing and joint investment platforms to create an integrated and efficient energy market that can aid energy price stability.