Macroeconomic uncertainty, foreign direct investment and institutional quality: Evidence from Sub-Saharan Africa

- The study examines the moderating effect of institutional quality on the relationship between macroeconomic uncertainty and foreign direct investment in Sub-Saharan Africa.
- The GARCH models of Engle (1982) and Bollerslev (1986) are employed to model the uncertainties in exchange rates.
- The results show that macroeconomic uncertainty adversely affects the flow of FDI, while institutional quality increases the flow of FDI.
- The interaction of institutional quality and macroeconomic uncertainty reduces the initial negative effect exerted by macroeconomic uncertainty on the flow of FDI.

This study examines how institutional quality moderates the relationship between macroeconomic volatility and foreign direct investment (FDI) in 40 countries in the Sub-Saharan African region over the period from 1996 to 2011. The GARCH models of Engle (1982) and Bollerslev (1986) are employed to model the volatility of macroeconomic uncertainty. The dynamic panel model estimation of Arellano and Bond (1991) and Blundell and Bond (1998) is used to analyze the relationship between foreign direct investment and the volatility of the macroeconomic variables. We find that macroeconomic uncertainty adversely affects the flow of FDI, while institutional quality also increases the flow of FDI in the presence of other control variables. The interaction between institutional quality and macroeconomic uncertainty reduces the initial negative effect exerted on the flow of FDI by economic uncertainty. Policy implications are drawn from the findings.