The relationship between foreign direct investment (FDI) and economic growth in sub-Saharan Africa (SSA) is complex and significantly influenced by the quality of institutions within recipient economies. While FDI is recognized as a crucial driver of economic development in capital-deficient SSA, attracting it requires a conducive institutional environment. Successive governments in the region have strived for global integration to boost FDI inflows, aiming for sustainable development goals (SDGs) following previous efforts towards millennium development goals (MDGs). However, FDI inflows have been inconsistent, with a significant drop in 2017, attributed to factors like declining rates of return on investment and shifts in global value chains towards intangible assets. This decline poses a challenge for policymakers, particularly in developing countries. Several determinants influence FDI flows, including policy, political, and institutional variables. Studies suggest that good infrastructure, natural resource endowments, substantial local markets, and a sound legal framework attract FDI, while accountability challenges and political instability deter it. A key concern is that FDI might displace domestic investment, a crucial element for sustainable economic development. Concerns also exist regarding inadequate technology transfer and potential negative impacts on the balance of payments. Despite a significant portion of global FDI flowing to developing economies, Africa continues to receive a relatively smaller share, primarily focused on extractive industries. This limited focus may not adequately stimulate domestic investment, crucial for bridging the savings-investment gap. The persistent challenges of institutional quality, social instability, and economic insecurity in SSA create an unfavorable investment climate, further reducing FDI inflow. Developing economies like those in SSA often lack the necessary elements to attract FDI, such as effective policies, institutional quality, and robust infrastructure which are needed to create a competitive and stable market environment. The research aims to assess the impact of institutional quality on FDI inflows and their subsequent effect on economic development in selected SSA countries.

Existing literature on the FDI-growth nexus in developing economies presents mixed evidence. While many studies show a positive correlation between FDI and economic growth, highlighting benefits such as increased capital accumulation, improved productivity, technology transfer, job creation, and export expansion, others present contrasting findings. The impact of FDI on economic growth hinges significantly on the host country's socio-economic environment. Some studies have shown a positive correlation between FDI and economic growth in specific countries or regions, while others find insignificant or even negative effects. For instance, studies in China and some Latin American countries reported positive correlations, while others in Nigeria, and a sample of least developed countries found the impact to be insignificant or even negative. Several theories explain FDI, including neoclassical microeconomic theory, which focuses on interest rate differentials, but fails to account for the role of transnational corporations (TNCs). Other theories emphasize intangible assets or monopoly advantages as key drivers of FDI. Internalization theory highlights the need for firms to internalize activities to maximize profits. New growth theory underscores the role of technological progress and investment in driving economic growth. However, these theories haven't fully explained why FDI might favor certain countries over others, particularly the marginalization of Africa. Recent studies emphasize the importance of institutions, suggesting that a favorable institutional environment is crucial for attracting and sustaining FDI. The role of governments in creating incentives to enhance FDI inflow is another important factor.

This study uses a new growth theory framework, focusing on human needs and the role of innovation and technological advancement in economic development. The model posits that economic development is a function of FDI, domestic investment (DOMINV), infrastructure (INFSR), political stability and absence of violence (PSAV), government effectiveness (GE), and accountability (ACC). The Human Development Index (HDI) serves as a proxy for economic development. The study employs a cross-country panel data set of 39 SSA countries from four regions (East, Central, Southern, and West Africa) covering the period 2000-2016. Data were sourced from the World Bank's World Development Indicators (WDI) and the World Governance Indicators (WGI). The HDI incorporates life expectancy, literacy rates, education enrollment, and GDP per capita. FDI represents net inflows of foreign direct investment, DOMINV reflects gross fixed capital formation, and INFSR is measured by access to electricity. PSAV, GE, and ACC are derived from the WGI. The study uses fixed and random effects regression models to estimate the relationships between the variables. A Hausman test determines the most suitable model (fixed or random effects). The model checks for multicollinearity to ensure the reliability of the results. The a priori expectation is that positive coefficients for investment components and institutional quality indicators would indicate a positive impact on human development (economic development).

Descriptive statistics show variations in HDI, FDI, DOMINV, infrastructure, political stability, government effectiveness, and accountability across the four SSA sub-regions. Southern Africa shows the highest HDI, while West Africa has the lowest. East Africa exhibits the highest FDI inflow, followed by West Africa, while Central and Southern Africa receive the least. The econometric analysis using the fixed effects model (chosen based on the Hausman test) reveals that political stability and the absence of violence significantly and positively impact both FDI inflows and DOMINV, which in turn positively affect economic development. A one-unit increase in FDI leads to a substantial increase in economic development. The analysis further demonstrates a positive association between infrastructure and economic development, supporting the idea that improved infrastructure enhances economic growth prospects. Political stability and absence of violence also positively influence economic development, indicating that a stable and well-governed environment attracts FDI and fosters economic growth. The study also assessed the presence of multicollinearity between the variables. The highest correlation observed was between HDI and infrastructure (0.7880), below the threshold to indicate significant multicollinearity, thus ensuring the reliability of the regression results.

The findings confirm the significant role of institutional quality in attracting FDI and driving economic development in SSA. Political stability, good governance, and accountability are crucial determinants of FDI inflows, aligning with previous research. The positive relationship between FDI and economic development supports the notion that FDI can contribute significantly to economic growth in SSA, particularly where supported by robust institutions. The results demonstrate that even in regions with low FDI inflows, domestic investment can play a significant role in economic development, illustrating the importance of balanced development strategies that leverage both domestic and foreign capital. The positive effect of infrastructure underscores the importance of investing in infrastructure development as a catalyst for economic growth. The absence of multicollinearity strengthens the reliability and validity of the findings.

This study highlights the critical role of institutional quality in attracting FDI and stimulating economic development in SSA. Political stability, effective governance, and accountability are essential for creating a favorable investment climate. While FDI is a vital component of economic growth, strategies should also focus on enhancing domestic investment to avoid over-reliance on foreign capital and to ensure a more balanced and sustainable approach to economic development. Future research could explore the specific mechanisms through which institutional quality affects FDI inflows and examine the long-term impacts of FDI on different sectors of the SSA economy.

The study's reliance on aggregate data may mask variations at the firm or sectoral levels. The study's timeframe (2000-2016) might not fully capture the dynamic changes in the global investment landscape. Future research could incorporate more disaggregated data and a longer time period to provide a more nuanced understanding of the relationship between institutional quality, FDI, and economic development in SSA. The selection of variables might not fully capture all relevant factors influencing economic development in SSA.