27 April 2012

Africa is a Country: Foreign Investment Edition (Branding Africa)

The BBC World Service is holding a radio debate this evening live from Kampala on whether Africa's image is prejudiced. This is part of growing media attention to efforts to try and "rebrand" Africa with some positive news stories, to provide a counter-balance to the typical land of rape and lions coverage.

The folks at Africa is a Country have some legitimate concerns, approvingly quoting Linda Polgreen;
What is more insulting than the idea of “positive news” from Africa? As if the continent was a dull witted child in need of encouragement.
Obviously my role in this debate is to point out some economic evidence, so here is Elizabeth Asiedu, "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?"
Countries in SSA have on the average received less FDI than countries in other regions by virtue of their geographical location-there is a negative effect on FDI for being an African country. The negative and significant estimated coefficient of the Africa dummy suggests that there may be an adverse regional effect for SSA. There are two plausible explanations for this. First, the continent is perceived as being inherently risky. This perception of Africa is supported by the empirical evidence of Haque, Nelson, and Mathieson (2000), who find that commercial risk-rating agencies often rate African countries as riskier than warranted by the fundamentals. Second, due to lack of knowledge about the countries in the continent, investment decisions are often not guided by country-specific conditions but rather based on inferences from the environment of neighbouring countries. Thus, to some extent, foreign investors evaluate African countries as if the countries in the continent constitute "one big country."
So after controlling for the main determinants of foreign investment; including openness to trade, infrastructure, and average returns to capital, sub-Saharan African countries still have FDI/GDP ratios 1.3% lower than comparable countries. Which is pretty substantial. Now - these kind of cross-country statistical regressions are not incredibly reliable, because you only have about 200 countries to work with, which isn't an enormous sample, and there are lots of things that we can't measure which might be screwing with the results. There is a cross-country regression which shows that penis length causes economic growth. But the results are still suggestive, plausible, consistent with qualitative impressions, and interesting.

Does anyone know any more up to date research on this?

And finally, if we were to believe these results - they make a pretty strong case for more of that tacky "brand Africa" PR. Now I'm a Bill Hicks fan, but what if we need some tacky marketing to change the world for the better?


Matt said...

Is 1.3% substantially lower? What's the overall distribution of FDI/GDP like? 

rovingbandit said...

Yeah I think so: http://bit.ly/Kg3bbv

rovingbandit said...

If I'm reading this table from the Asiedu paper correctly (its been a while), average in Africa is 0.89% and other developing countries is 2.47%, and almost all of that gap is "explained" (or not explained) by the Africa dummy?  http://screencast.com/t/TfJ4fhjz2u7

Nick said...

I based my econometrics project on this very paper. The biggest problem of modelling FDI is the lack of a proper theoretical framework to base empirical work on - variables are simply chosen based on instinct and then explained ex-post - I seem to remember reading about 10 different studies on FDI and they all contradicted one another - all of them were VERY sensitive to data selection.... 

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