Trust and Foreign Direct Investment in Sub-Saharan Africa

Abstract

Our paper explores the intricate relationship between trust and foreign direct investment (FDI) in Sub-Saharan Africa (SSA). We aim to answer the research question: “Is there a positive relationship between trust and foreign direct investment in Sub-Saharan Africa?” To this end, we employ a comprehensive empirical analysis by investigating statistical significance of coefficients. Our quantitative analysis, which employs data on trust from World Value Survey and World Bank FDI data across SSA from 1989-2021, reveals a positive and statistically significant relationship between trust and FDI inflows.

Our interviews with locals provide corroborative insights, emphasizing the centrality of trust in attracting and maintaining foreign investments. Furthermore, our research establishes a significant negative relationship between crime rate and FDI inflows, supporting our findings on the relationship between trust and FDI. However, the findings are constrained by limitations related to data availability, sample size, and potential biases, which may affect the generalizability of our results.

This paper contributes to the existing literature by substantiating the positive effect of trust on FDI inflows, particularly in the context of SSA. It underscores the role of trust in economic growth, crime reduction, and effective governance. It concludes with recommendations for future research to delve into the dynamics of trust more comprehensively and suggestions for SSA governments to leverage trust to stimulate economic growth. The findings can inform more effective policies to attract foreign investment and foster sustainable economic growth in the African continent.