Demand Side Factors Affecting the Inflow of Foreign Direct Investment to African Countries: Does Capital Market Matter?

This paper aims at providing empirical analysis of the demand side determinants of the inflow of Foreign DirectInvestment to African nations, with particular emphasis on stock market availability. Due to data heterogeneity,non-continuity and because the Hausman test favors it, cross section fixed effect Least Square Dummy Variable(LSDV) estimation technique is used. Natural resource, labor quality, trade openness, market accession andinfrastructure condition are found to have positive and significant effect. Availability of stock market has theexpected positive but insignificant effect. In search of possible explanation governments’ expenditure andprivate domestic investment are added to the regression equation and are found to have positive effect, ruling outthe possibility of crowding out effect. Stock markets in Africa are not structured in such a way that they cancontribute to attract FDI and hence policy makers should restructure capital markets to get the most out of them.The bottom line is, policy makers of those countries have a lot of demand side instruments under their discretionto attract FDI inflow.