Profiling sectoral risks of foreign direct investment in africa

In recent years foreign direct investment has become an integral part for fostering economic growth and development in Africa. Country risk and other risks are frequently mentioned in the media but few studies have attempted to investigate the actual link between risk and FDI and none in Africa. Based on FDI markets data and the Economist Intelligence Unit operational risk model, we use structural equation modelling to estimate sectoral composition of risk factors for FDI in Africa. Sectors included are Metals, Automotive OEM, Communications and Real Estate. The results of the study give different sets of risk factors that are relevant per sector. Significance lies with influencing the actual investment decision as the level of FDI is insignificant. We conclude that each sector has significantly different risk considerations but that all the sectors has main considerations that revolve around government effectiveness, legal risks and taxation policy risks.

JEL F21, F23

Keywords: Foreign Direct Investment (FDI), Risk, Africa, Country Risk, Structural Equation Modelling (SEM)