The Impact of Business Climate on Foreign Direct Investment in the CEMAC Region

Abstract

Globally, Foreign Direct Investment (FDI) is often seen as an important catalyst for economic growth because it affects economic growth by stimulating domestic investment, capital formation, employment, export earnings and technological transfer. As a result, policy makers of most economies especially non-natural resource rich economies have undertaken socio-economic, legal, political and institutional reforms in order to attract foreign direct investment. This study examines the impact of the business climate on foreign direct investment in the Economic and Monetary Union of Central African States (CEMAC) region from 2007 to 2014 using panel data collected from the World Bank, the United Nations Conference on Trade and Development (UNCTAD), Transparency International, the Heritage Foundation and the Mo Ibrahim Foundation. Through the adoption of the Feasible Generalized Least Squares (FGLS) technique of estimation, the study finds that the doing business index, the corruption perception index and the Ibrahim Index of African Governance positively and significantly affect foreign direct investment in the CEMAC region. Moreover, the study finds that some components of the Doing Business Index (starting a business, dealing with construction permits, registering property, paying taxes, protecting investors, trading across borders, enforcing contracts and resolving insolvency) positively and significantly affect foreign direct investment in the CEMAC region. However, economic freedom index and other components that constitute the Doing Business Index (registering property, getting credit and trading across borders) though with positive coefficients do not significantly affect foreign direct investment. The study recommends that policymakers of the CEMAC region put in place laws, measures and structures that improve the business climate of the region in a bid to attract more foreign direct investment.

Keywords: Business Climate, Foreign Direct Investment, CEMAC, Feasible Generalized Least Squares.