Human Capital Development, War and Foreign Direct Investment in Sub-Saharan Africa

The authors use a panel data fixed effect model to identify the determinants of foreign direct investment (FDI) for a large sample of 29 sub-Saharan African countries from 1980 to 2003. They test whether human capital development, defined by either literacy rates or economic freedom, and the incidence of war affect FDI flows to these countries. Combining these explanatory variables to several widely used control variables, it was found that the literacy rate (human capital), freedom (political rights and civil rights) and the incidence of war are important FDI determinants. The results confirm our expected signs: FDI inflows respond positively to the literacy rate and to improvements in political rights and civil liberties; war events, by contrast, exert strong negative effects on FDI. For robustness, the model is estimated for religious groupings of sub-Saharan African countries.