Determinants of foreign direct investment in SADC region: Case of financial development, institutions and openness

Abstract

Background: Countries in the Southern African Development Community (SADC) region have experienced low growth coupled with high levels of poverty and inequality. Economic growth has been touted as one of the major factors to deal with these problems. However, the lack of financial resources has hampered the efforts to achieve high levels of growth. This has therefore resulted in the countries putting much effort on attracting foreign capital.

Aim: The study aims to investigate the extent to which financial development (FSD), financial openness, and institutional quality determine the inflow of foreign direct investment (FDI) in the SADC region.

Setting: The study focuses on 15 countries in the SADC region from 2008 to 2022.

Method: The study employs the Generalised Method of Moments (GMM) technique given the problem of endogeneity between the variables of interest.

Results: The findings from the study indicate that FSD and financial openness are important factors determining the flow of FDI to the SADC region. On the other hand, the effect of institutions was found to be significant when taking into account the state of FSD and financial openness.

Conclusion: Policymakers are encouraged to focus on enhancing institutional frameworks, promoting FSD, and increasing financial openness to optimise capital inflows.

Contribution: The study contributes to the available studies by incorporating the role that is played by institutional quality and financial openness to the modelling. This becomes important as the region aims at attracting more foreign capital so as to improve growth as domestic capital supply falls short of domestic capital demand.