Research on the effect of socio-political risk on foreign direct investment (FDI) flows in West Africa opened the 2011 edition of the Virtual Institute fellowship programme, funded by the Government of Finland.
Despite a number of measures taken by ECOWAS countries to attract investors, inflows remain relatively low, suggesting lower-than-desired attractiveness of the region for foreign investors. The multiplication of civil conflicts, coups d’état and other political and social disturbances, led Cherif Sidi Kane, of Senegal’s Vi member, Cheikh Anta Diop University (UCAD), to explore the impact of these factors on FDI flows.
The first fellowship beneficiary of this cycle, Kane is a researcher and teacher at the Centre for Applied Economic Research (CREA) of UCAD’s Faculty of Economics and Management. Under the guidance of Kalman Kalotay and Astrit Sulstarova, of UNCTAD’s Division on Investment and Enterprise, and based on specialized literature and recent data, Kane was able to choose a proper methodological approach and refine the scope of his research during his stay in Geneva.
On April 12, he presented the preliminary results of his five-week fellowship (April 7 – 13 May) during an informal discussion with UNCTAD experts and a representative from the Permanent Mission of Senegal.
Kane explained that among the six variables that make up the socio-political risk indicator -- freedom of speech and responsibility; political stability and absence of violence, credibility of the State; quality of laws and regulations; rule of law; and corruption -- three of them show the strongest influence in Economic Community Of West African States countries: credibility of the state, rule of law and corruption.
His analysis shows Guinea and Côte d’Ivoire, countries with higher risk, attract little FDI, as expected. Paradoxically, Cape Verde, Ghana and Senegal, countries with the lowest risk, attract moderate levels of FDI, and Nigeria, despite being in the group of countries with higher risk, is successful in attracting investment.
The presentation was followed by a discussion on other economic factors that may affect the flow of foreign direct investment, and on Kane’s preliminary policy recommendation encouraging ECOWAS countries to create a socio-political and legal framework that would reinforce the rule of law and the credibility of the State while combating corruption.
Kalotay, Kane’s mentor, welcomed the research on this topic and was pleased to see that UNCTAD studies on FDI determinants proved to be correct: for manufacturing activities, socio-political stability was more important, while it was less so for natural resource-based activities. He was also pleased with Kane’s plans to disseminate his findings among policymakers, and suggested that it may be interesting to conduct a comparative study with other regions in Africa in the future.
Mamour Niang, first counsellor of Senegal’s permanent mission, commended the quality of the work that was presented. He added that although the socio-political environment is an important factor for attracting FDI flows, the expectation of profit may be even more important, as in the case of Nigeria. Even if a country is stable, he said, it will not be sufficiently attractive for investors if there exist deterrents such as deficient infrastructure, unstable supply of electricity, lack of qualified human resources, and excessive unionization of the labour force.
The discussion also gave rise to other useful suggestions to fine-tune the econometric methodology, such as testing for multicollinearity, dealing with the problem of endogeneity, and testing for Granger causality.
During the fellowship, Kane completed the literature review, selected the methodology and began collecting data for the econometric model. He said that his findings will be incorporated in his course on development economics, and hoped to publish the completed paper in one of the French-language regional research journals or in CREA’s own journal.
In terms of dissemination to policymakers, the paper could be presented during a "Journées de l’économie sénégalaise" at which UCAD’s research is presented to academics, the government and other stakeholders, or the paper could be sent to the Permanent Mission to the United Nations of Senegal in Geneva for further distribution and use.
Finally, Kane acknowledged the contribution of the fellowship to his professional development and career advancement, as publication of this research could play an important role as he prepares his "concours d'aggrégation" – the highest professor certification in the French university system.