Foreign Direct Investment and Sustainable Development in Sub-Saharan Africa

Abstract

The aim of this study is to empirically examine the determinants of FDI and environmental sustainability in sub-Saharan Africa over the period 1985-2012. This thesis provides a novel framework to examine determinants of FDI and their relationship to sustainable development, particularly in the context where most sub-Saharan African countries are characterised by relatively less stringent environmental regulations and have also adopted substantial structural reforms, mainly driven by liberalisation and private-sector participation. The study begins with the empirical application of the theoretical framework of the modified knowledge-capital (KC) model of multinational enterprises (MNEs) to determine the motives for FDI in sub-Saharan Africa. Using bilateral panel dataset for 30 Organisation for Economic Cooperation and Development (OECD) parent countries and 28 sub-Saharan African host countries, the results indicate that both horizontal and vertical investments are important to sub-Saharan Africa’s economy. Furthermore, MNEs are increasingly mobile, searching sub-Saharan Africa for markets, lower costs, raw materials and agglomeration economies. The findings reveal that relative environmental regulatory stringency difference between the parent and host country is a positive and significant determinant of inward FDI, providing evidence of a pollution haven in sub-Saharan Africa. In addition, using the aggregate variable approach, the study provides an empirical model for examining FDI patterns in 13 sub-Saharan African countries. We construct the new dataset on structural reforms and environmental regulatory stringency based on the energy use approach. The study shows that inward FDI to the region is determined by the host country’s level of environmental regulation. The findings indicate that MNEs exploits favourable economic conditions, growth prospect, governance and institutional quality, return on investment, human capital, infrastructure, natural resources and agglomeration economies. Further, trade liberalisation can help promote FDI, however, financial liberalisation such as financial sector development and bank efficiency as well as privatisation of state-owned enterprises has no compelling effect on productive FDI to the region. The results also suggest that more stringent environmental regulation in host countries deter inward productive FDI. We confirm the presence of a pollution haven in sub-Saharan Africa. Finally, the role of FDI for sustainable development is empirically examined. Using the extended Stochastic Impact by Regression on Population, Affluence and Technology (STIRPAT) framework, this study conducts a comparative analysis for Nigeria and South Africa during the period of review. We examine the short-run and long-run dynamics between CO2 emissions and its determinants. Urbanisation contributes to CO2 emissions reduction in South Africa, while population growth does not increase CO2 emissions in both countries. The findings confirm that economic growth and energy consumption are key determinants of CO2 emissions in both countries. While South Africa has maintained a significant reduction in energy intensity and a lesser impact of economic growth on the environment, Nigeria is different. We find no evidence in support of an environmental Kuznets curve (EKC). Moreover, FDI has a negative effect on CO2 emissions in Nigeria. This supports the pollution halo hypothesis, which posits that FDI is conducive to the transfer and diffusion of ‘clean’ (energy) technology. The results also suggest that strengthening governance and democratic institutions could improve environmental sustainability.