Foreign Direct Investment and Uncertainty: Empirical Evidence from Africa

The focus of this paper is to examine the impact of economic and political uncertainty on foreign direct investment (FDI) flows to African economies. Flows of manufacturing and non-manufacturing U.S. FDI into a sample of host countries in Africa are analyzed in this study. A generalized autoregressive conditional heteroscedasticity (GARCH) model is used to generate economic uncertainty indicators of the inflation rate and the real exchange rate. The results of the study show that for aggregate U.S. FDI flow, economic and political uncertainties are not major concerns. However, for U.S. manufacturing and non-manufacturing FDI flows, economic uncertainties are the major impediments only when combined with political instability and external debt burden.