HETEROGENEOUS INFLUENCE OF ECONOMIC POLICY UNCERTAINTY ON FOREIGN DIRECT INVESTMENT IN SUB-SAHARAN AFRICAN (SSA) COUNTRIES: MODERATING ROLE OF INSTITUTIONAL QUALITY

Abstract

In recent years, the world economy has experienced a number of events that have created uncertainty, resulting in many studies on its economic implications. Nonetheless, there is still a dearth of empirical evidence regarding how economic policy uncertainty (EPU) affects foreign direct investment (FDI) in the context of Sub-Saharan African (SSA). Furthermore, studies have yet to investigate the moderating role of governance institutions in the relationship between uncertainty and FDI in the region. To close these gaps, the study used the novel instrumental variable panel quantile regression (IVPQR) and method of moments quantile regression (MMQR) on a panel of 23 SSA nations between 2004 and 2022. The study presents several noteworthy findings, including the following: (i) country-specific EPU substantially deteriorates the region’s FDI flows; (ii) world-based EPU boosts the flow of FDI into the region, suggesting that during times of global unrest, risk-averse foreign investors look for investment protection in the region to reduce their risk exposure or act as a hedge against financial losses brought on by the world-wide unrest; (iii) while domestic EPU enervates the region’s FDI, improvement in institutional quality mitigates the adverse effect of country-specific EPU on FDI; (iv) the influence of EPU and institutional quality on FDI is heterogeneous indicating that countries with high EPU experiences more devastating decline in FDI while those with high quality of institution, more improved FDI flows. The study highlighted the findings’ policy implications.