Corruption and Foreign Direct Investment Inflows: Evidence from West Africa

Abstract

The significance of foreign capital inflows to West Africa cannot be underestimated, more so when almost all the countries in the sub-region are virtually aid-dependent. One way to access this much-needed resource can be through Foreign Direct Investment (FDI). This rationalization has ignited a stiff competition for FDI among nations, sub-region and regions. However, FDI inflows to West Africa have been dwindling over the years, which may impede efforts to achieve the Sustainable Development Goals (SDGs) by 2030, as well as the economic self-reliant of countries in the sub-region. And, a major factor that has been largely associated with low FDI inflows is corruption. Against this backdrop, the thesis attempts to achieve three objectives namely, (i) Investigate the long and short-run effect of corruption on FDI inflows to West Africa, (ii) Establish a threshold level for which corruption can or cannot discourage FDI inflows to West Africa and, (iii) Explore whether the effect of corruption on FDI inflows in West Africa differs in the West African Monetary Zone (WAMZ) and the West African Economic and Monetary Union (WAEMU). The thesis used a panel data of 15 countries for the period 1999-2018, whilst employing the Panel Autoregressive Distributed Lag (ARDL) estimation technique. The results indicated that in the long-run, corruption adversely affects the inflow of FDI to West Africa, which is in agreement with the grabbing hand hypothesis. Furthermore, from the results, it was determined that the long-run threshold level of corruption for West Africa was 6.3, below which FDI inflows cannot be discouraged by corruption, otherwise, FDI inflows could be discouraged. Finally, the results revealed that in the long-run corruption negatively affect the FDI inflow in both WAMZ and WAEMU, albeit at different magnitudes. However, the short-run panel estimates failed to determine a corruption threshold level for West Africa, while the effect of

corruption on FDI inflows was only found to be statistically significant for WAEMU, which show support for the helping hand hypothesis. Nevertheless, the country-specific short-run results were found to show differences in signs and significance across countries, hence, showing support for both the grabbing hand and helping hand hypotheses. Also, a short-run country-specific threshold level of corruption was established for both Mali and Burkina Faso as 6.2 and 4.9, respectively. Based on the results, it is recommended that governments should focus on mechanisms that will strongly discourage people from engaging in corruption by reducing unnecessary delays and ensuring that the consequences for perpetrators are dire. Furthermore, governments, particularly in countries that had a score above the threshold level, should intensify efforts to fight corruption and reduce it to at least the threshold level, which is just enough for attracting FDI. This can be done by strengthening, and ensuring effective monitoring of public institutions and agents while providing a reward for honesty.