Author(s): Patricia Lindelwa Rudo Makoni
The primary objective of this study was to explore the relationship between FDI, FPI and institutional quality using a panel of nine African countries, over the period 2009-2016. This period was of interest as it was immediately after the global economic crisis of 2007/2008, which resulted in international capital flight from host countries due to the flouting of many market regulations and other similar institutions. Using various econometric approaches, we found that where natural resources and developed financial markets were absent, institutional quality mattered for both FDI and FPI inflows. Further, we established a positive relationship between FDI and FPI, in line with theory and earlier empirical studies. Our study’s novelty lies in that it applies the Kuncic database of institutional quality, which is more comprehensive than other single source databases. In light of our findings, the policy recommendations put forth are that the Governments of these developing African countries formulate and implement investment policies to attract FDI and FPI by ensuring that the operating governance environment is conducive, and hindrances such as expropriation risk, poor corporate governance and political instability are absent. This will assist these countries to further grow their economies, by supplementing domestic savings and investments with international capital inflows to boost local production, increase employment, economic growth and other trade opportunities.