Growth Effects of Foreign Direct Investment (FDI) From China and Other Sources in Africa: The Role of Institutional Quality

Journal of Economics and Business

ISSN 2615-3726 (Online)

ISSN 2621-5667 (Print)

Published: 30 September 2019

Growth Effects of Foreign Direct Investment (FDI) From China and Other Sources in Africa: The Role of Institutional Quality

Marvellous Ngundu, Nicholas Ngepah

University of Johannesburg, South Africa

Download Full-Text Pdf


Pages: 1026-1038

Keywords: Foreign Direct Investment, Panel Threshold Regression, Rule of law


This study examines the effects of Foreign Direct Investment (FDI) from China, United States (US), European Union (EU) and the rest of Asia on economic growth conditional on the institutional quality of sub-Sahara Africa for the period (2003-2012). We develop theoretical argument from the existing literature to show that institutional heterogeneity may be one of the description for mixed findings of previous empirical studies on the growth effects of Chinese FDI in Africa. We use rule of law to proxy for institutional quality. Using Panel Threshold Regression (PTR) model, we show that FDI from all these sources have a positive impact on growth only above certain thresholds of rule of law and these thresholds differ from one source to the other. However, for FDI from China and the rest of Asia, the difference is marginal. That is, the growth effect of FDI from Asia is positive in countries with governance rating of at least -0.89 while negative in countries falling within a range of -1.35 and -0.89. In terms of FDI from EU and US, beneficial outcomes on growth are realized in countries with governance rating of at least -0.90 and -0.62, respectively. These results confirm that China and the rest of Asia do invest in both weak and strong governance countries in sub-Sahara Africa although the impact is different. Whereas, US and EU seem to invest only in strong governance African countries. However, the former is more sensitive to institutional quality than the latter.


  1. AbuAl-Foul, B.M. & Soliman, M., 2014. Foreign Direct Investment and LDC Exports: Evidence from the MENA Region. Journal of Reviews on Global Economics, 2014, 3, 328-339, 44(2), pp.4–14. Available at:
  2. Ayodele, T. & Sotola, O., 2014. China in Africa: An evaluation of Chinese investment. IPPA Working Paper Series, pp.1–20. Available at:
  3. Bassanini, A. & Scarpetta, S., 2001. The driving forces of economic growth: panel data evidence for the OECD countries. OECD Economic Studies, 33(33), pp.9–56. Available at:
  4. Davies, R.B., 1987. Hypothesis testing when a nuisance parameter is present only under the alternative. Biometrika, 74(1), pp.33–43. Available at:
  5. Gonzalez, A., Teräsvirta, T. & Van Dijk, D., 2005. Panel Smooth Transition Regression Models. Quantitative Finance Research Centre, Research Paper 165, (August), p.34.
  6. Hansen, B.E., 1996. Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica, 64(2), pp.413–430.
  7. Hansen, B.E., 1999. Threshold effects in non-dynamic panels : Estimation , testing , and inference. Journal of Econometrics, 93, pp.345–368.
  8. Hayat, A., 2014. FDI and Economic Growth : The Role of Natural Resources Arshad Hayat. IES Working Paper: 36/2014. Available at:
  9. Jude, C. & Levieuge, G., 2015. Growth Effects Of FDI In Developing Economies: The Role of Institutional Quality. Banque De France Eurosysteme, (559).
  10. Li, T.Y. & Hook, L.S., 2014. FDI and Growth : The Role of Institutional Quality. ISSN: 2231-962X, 9, pp.582–588.
  11. Mankiw, N., Romer, D. & Weil, D., 1992. A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107, pp.407–38.
  12. McMillan, M. & Harttgen, K., 2014. What is driving the ‘African Growth Miracle’? Working Paper Series: African Development Bank Group, (209). Available at:
  13. Morrissey, O. & Udomkerdmongkol, M., 2012. Governance, Private Investment and Foreign Direct Investment in Developing Countries. World Development, 40(3), pp.437–445.
  14. Neuhaus, M., 2006. The impact of FDI on economic growth: An analysis for the transition countries of central and Eastern Europe M. Miller, Werner A., Bihn, ed., London NWl 9NB: Physica-Verlag A Springer Company.
  15. North, D., 1990. Institutions, Institutional Change and Economic Performance, Cambridge, MA: Cambridge University Press.
  16. Peres, M., Ameer, W. & Xu, H., 2018. The impact of institutional quality on foreign direct investment inflows: evidence for developed and developing countries. Economic Research-Ekonomska Istraživanja, 31(1), pp.626–644. Available at:
  17. Renard, M. & John, C., 2011. 2011-Chinese FDI & Trade in Africa pp38. Working Paper Series: African Development Bank, (126). Available at:
  18. Rodrik, D., 2014. An African growth miracle? NBER WORKING PAPER SERIES, (20188), pp.2–33. Available at:
  19. Su, Z. & Ado, A., 2016. China in Africa: a critical literature review. critical perspectives on international business, 12(1). Available at:
  20. Unisa Yusufu, K., 2013. Foreign Direct Investment and Growth in Sub-Saharan Africa What are the Channels? Available at:

About Us

The Asian Institute of Research is an online and open-access platform to publish recent research and articles of scholars worldwide. Founded in 2018 and based in Indonesia, the Institute serves as a platform for academics, educators, scholars, and students from Asia and around the world, to connect with one another. The Institute disseminates research that is proven or predicted to be of significant influence for the general public.

Contact Us

Please send all inquiries to the email:

Business Address:

5th Floor, Kavling 507, Fajar Graha Pena Tower, Jl. Urip Sumohardjo No.20, Makassar, Indonesia 90234

Copyright © 2018 The Asian Institute of Research. All rights reserved

Stay Connected

  • Instagram - Black Circle
  • Facebook - Black Circle
  • LinkedIn - Black Circle