Does the quality of institutions matter for foreign investment concentration in Africa? Understanding the controversial role of international aid

• Published date: 01 February 2022
• Author: Ludovic Feulefack Kemmanang,Jonas Juleo Dongmo Zamké
• Date: 01 February 2022
• DOI: http://doi.org/10.1111/rode.12825

354

|

wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2022;26:354–374.

© 2021 John Wiley & Sons Ltd

Received: 4 June 2020

|

Revised: 6 July 2021

|

Accepted: 11 August 2021

DOI: 10.1111/rode.12825

REGULAR ARTICLE

Does the quality of institutions matter for foreign

investment concentration in Africa? Understanding

the controversial role of international aid

LudovicFeulefack Kemmanang1

|

Jonas JuleoDongmo Zamké2

1United Nations Economic Commission for

Africa, Lusaka, Zambia

2Department of Analysis and Economics

Policies, University of Dschang- Cameroon,

Dschang, Cameroon

Correspondence

Ludovic Feulefack Kemmanang, United

Nations Economic Commission for Africa,

Lusaka, Zambia.

Email: ludovic.feulefackkemmanang@

un.org

Abstract

This article investigates how the quality of institutions

shapes foreign direct investment (FDI) concentration and

assesses the impact on African attractiveness, controlling

the effect of bilateral aid. Based on data from 37 African

countries over the period 2009– 2018 and using the general-

ized method of moments, the paper finds that FDI concen-

tration crowds out FDI inflows from countries other than

the former colonizer, causing Africa to lose nearly three-

quarters of its potential. In contrast, investors from the old

metropolis exhibit an accommodation effect on their former

colonies' characteristics. Our study also finds that there is

an inverse relationship between the quality of institutions

and FDI concentration. Besides, bilateral aid from countries

other than the former metropolis reduces FDI concentration,

while bilateral aid from the former colonizer strengthens

FDI concentration. Finally, the study shows that bilateral

aid modulates the impact of the quality of institutions, such

as aid from the former colonizer reduces the impact of the

quality of institutions, while aid from other countries re-

inforces its marginal effect. Therefore, African countries

should consider undertaking reforms to build institutions

strong enough to improve their attractiveness and divest

from the grip of international aid.

KEYWORDS

bilateral aid, colonial legacy, concentration, curse, foreign direct

investment

|

355

FEULEFACK KEMMANANG ANd dONGMO ZAMKÉ

1

|

INTRODUCTION

The abundant literature on foreign direct investment (FDI) attractiveness has highlighted the impor-

tance of the host countries’ characteristics, including macroeconomic factors and, recently, the quality

of institutions (Feulefack & Ngassam,2020; Jumanne & Keong,2018; Sen & Sinha,2017; Ullah &

Khan,2017). However, even the most recent studies focusing on the role of institutions have failed to

explain why FDI appears more concentrated in some host countries than others (see Figure1b) and

whether a high concentration could significantly impact the overall attractiveness of the nations.

Yet foreign investment was one of the first manifestations of capitalist expansion, searching for

sheltered markets in backward regions (Hobson,1902; Lenin,1916). As a result, firms from the col-

onizing country arrived first (Makino & Tsang,2011), and the institutional framework put in place

guaranteed them monopolistic shares of investment and profits (Svedberg, 1982). Over the years,

while the monopoly of some former metropolises has been significantly diluted, others have been

maintained (see Figure1a).

In an attempt to explain these differences, this study investigates institutional changes. Indeed,

the institutions initially set up in Africa being considered as colonial legacy (Acemoglu etal.,2001;

Seidler,2011), and the firms from metropolitan areas having settled first, they could have had the

advantage of being familiar with the institutional environment of the host countries. Even the weaving

of the webs of dependence with the power- holding elites (Agr ippah,1979) could have given the firms

originating in the metropolis a comparative advantage in the establishment. In line with this reason-

ing and the research findings on the role of the quality of institutions, as the institutional framework

JEL CLASSIFICATION

F21; F63; F54

FIGURE 1 Overview of the concentration of FDI (foreign direct Investment) in Africa, 2009– 2018. (a) Share

of FDI inflows from former colonizer. (b) FDI concentration index. Source: Authors, based on IMF (CDIS, 2020).

Angola (AGO), Benin (BEN), Botswana (BWA), Burkina Faso (BFA), Burundi (BUR), Cameroon (CMR), Central

African Republic (CAR), Congo (CGO), Democratic Republic of Congo (DRC), Gabon (GAB), Ghana (GHA),

Guinea Bissau (GNB), Egypt (EGY), Equatorial Guinea (EQG), Côte d'Ivoire (CIV), Lybia (LYB), Madagascar

(MDG), Mali (MLI), Mozambique (MOZ), Namibia (NAM), Niger (NER), Nigeria (NGA), Rwanda (RWD),

Seychelles (SYC), Tanzania (TZA), Tunisia (TUN), Togo (TGO), Zambia (ZAM), and Zimbabwe (ZWE) [Colour

figure can be viewed at wileyonlinelibrary.com]

 

&*2

&05

&,9

1(5

%(1

&$5

%:$

02=

$*2

*+$

7=$

1*$

(4*

(*<

%85

*1%

'5&

/<%

=:(

(a) 6KDUHRI)',LQIORZVIURPIRUPHUFRORQL]HU

  



&*2

&05

=:(

'5&

0'*

*$%

(7+

6<&

1$0

/<%

%(1

5:'

7*2

*+$

781

1*$

0/,

=$0

%)$

(b) )',FRQFHQWUDWLRQ,QGH[