The Determinants of Foreign Direct Investment in the African Union

 Abstract—This paper will examine the factors that influence foreign direct investment (FDI) flows into African countries. FDI flows are important for African nations as they promote economic development. Estimation results using the Least Squares Dummy Variable model also known as the fixed effects model indicate that i) a high economic risk has a negative and significant effect on FDI flows into Africa ii) both political risk and financial risk have a negative but insignificant impact on FDI inflows iii) there is a positive and significant relationship between the commodity price index performance and FDI inflows iv) the good performance of stock markets in developed countries has a positive and significant impact on FDI inflows v) an increase in the infrastructure of a country has a positive and significant effect on FDI inflows vi) an increase in openness to trade has a positive and significant effect on FDI inflows vii) the amount of FDI received in the previous year by African countries is significant in influencing the FDI flows that come into the African continent in the current year. Annual data from 1984 until 2010 using 35 African countries is used for this panel study.

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