The determinants of Foreign Direct Investment in Zambia (1990-2011)

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Mwale, Theresa
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Developing countries among others have come increasingly to see the important role of foreign direct investment (FDI) in economic development, growth and employment. Thus, most of these countries have undertaken various policy incentives to attract FDI. Zambia has not been left out in this struggle to attract FDI. However, despite having a liberal trade policy with minimal restrictions on international transactions and a free exchange rate policy with no capital controls, Zambia’s FDI inflows have not changed significantly in the last twenty years, exhibiting sharp declines and rises in specific years and accounting for only a negligible share regionally. The ultimate objective of this study is to identify and examine the major factors determining inflows of FDI in Zambia over the period of 1990 to 2011. In doing so, the study reviews both FDI empirical and theoretical literature to identify potential determinants of FDI. An analysis of Zambia’s investment climate relative to other countries is also done. This brings out many important determinants of FDI and Zambia’s competitiveness regionally and globally. Using time series data, an empirical model using the ordinary least squares (OLS) technique is then estimated to establish the significance and relevance of the potential FDI determinants to Zambia. Various diagnostic tests are also carried out to ensure robustness of results. The analysis of Zambia’s investment climate relative to other countries reveals that Zambia’s business environment, governance, infrastructure quality and macroeconomic environment does not compete fairly with its peers regionally. There is room for improvement to create a much more attractive investment climate that will be able to compete regionally and globally. The empirical analysis results found the major determinants of FDI in Zambia to be resource availability, trade openness, infrastructure development and macroeconomic fundamentals such as real effective exchange rate. One implication of the overall findings is that, FDI in Zambia is not only driven by factors such as natural resources in as much as it has been concentrated in the Mining sector. Lack of diversification could actually be among the reasons for the instability of FDI flows. Another implication of the findings is that, determinants that are significant in one country may not be significant in another. Also, the mere location of a country, for instance a country located in Africa, does cloud investor perceptions even in a politically stable environment due to traits associated with the regional location. The study supports an appropriate strategy that will attract investment that helps to exploit the country’s rich resource base in a sustainable manner, promote diversification and to expand export capacity by taking advantage of privileged market access opportunities. This means addressing the infrastructural constraints and stabilizing macro-economic fundamentals such as interest rates, exchange rate and inflation, which are essential for enhancing Zambia’s prospects for both domestic and foreign investment.