Foreign direct investment and trade policy openness in Sub-Saharan Africa

In contrast to previous studies on the relationship between trade openness and FDI inflows, this study develops a new measure of trade openness. Principal component analysis was employed to generate an index to capture trade policy openness. The study used cost of exporting and importing as well as the number of days and the number of documentation it takes to complete a trade transaction (both import and export) in the doing business indicators dataset to create an index for trade policy openness. This provides a better measure of trade openness compared with the traditional measure of trade openness which takes into the volume of trade. The traditional measure of trade openness may be affected by more than ordinary trade policy of an economy. Other factors such as access to foreign markets, the size of the internal market and the size of the an ecnomy can probably affect the trade to GDP ratio. However trade policy openness is free of these problems. The study employed both static and dynamic panel estimation technique to analyse the relationship between trade policy openness and FDI inflow for 29 sub Saharan African countries. The result from the study indicates that, policy openness affect FDI inflows positively. The study recommends that, more efforts should be targeted at reducing cost of trade and also increases the ease of cross boarder trading activities. This would ensure the flow of required level of FDI to the region for economic transformation.