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Quantitative Finance and Economics

2024, Volume 8, Issue 1: 103-125. doi: 10.3934/QFE.2024005
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Research article

Effect of governance on investment: Evidence from Sub-Sahara Africa

  • 1.
    Department of Economic Studies, School of Economics, University of Cape Coast, Cape Coast, Ghana
  • 2.
    Department of Finance, School of Business, University for Development Studies, Tamale, Ghana
  • Received: 26 December 2023 Revised: 07 February 2024 Accepted: 21 February 2024 Published: 23 February 2024

  • JEL Codes: C23, E02, E22, H54, P48

  • In this study, we investigated the impact of institutional quality on private and public investments in sub-Saharan Africa (SSA) using a sample of forty-one (41) countries between 2002–2021 using a system GMM. Using seven proxies of institutional variables, the results showed that all the institutional proxies had a positive and significant effect on private investment and a negative effect on public investment. We argued that higher institutional quality reduced the costs of doing business, increased investor confidence in the economy, and that property rights enforcement and the legal system increased the attractiveness of private investment in the region. Conversely, for public investment, we argued that better institutional quality exposed the inefficiency of the sector as they were mostly used for rent-seeking and perpetrate corruption, and as such reduced public investment. The results were also robust to different measures of institutions and governance indicators. We recommended that SSA governments improve project oversight and accountability, reduce corruption, promote transparency and citizen participation, strengthen anti-corruption measures, and invest in infrastructure through public-private partnerships in order to improve efficiency in the public sector. Also, governments must ensure lower lending rates, improve the efficiency of credit markets, and ensure better institutional indicators in order to increase private investment.

    Citation: Mohammed Gbanja Abdulai, Yazidu Ustarz, Daniel Chris Boakye. Effect of governance on investment: Evidence from Sub-Sahara Africa[J]. Quantitative Finance and Economics, 2024, 8(1): 103-125. doi: 10.3934/QFE.2024005

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  • In this study, we investigated the impact of institutional quality on private and public investments in sub-Saharan Africa (SSA) using a sample of forty-one (41) countries between 2002–2021 using a system GMM. Using seven proxies of institutional variables, the results showed that all the institutional proxies had a positive and significant effect on private investment and a negative effect on public investment. We argued that higher institutional quality reduced the costs of doing business, increased investor confidence in the economy, and that property rights enforcement and the legal system increased the attractiveness of private investment in the region. Conversely, for public investment, we argued that better institutional quality exposed the inefficiency of the sector as they were mostly used for rent-seeking and perpetrate corruption, and as such reduced public investment. The results were also robust to different measures of institutions and governance indicators. We recommended that SSA governments improve project oversight and accountability, reduce corruption, promote transparency and citizen participation, strengthen anti-corruption measures, and invest in infrastructure through public-private partnerships in order to improve efficiency in the public sector. Also, governments must ensure lower lending rates, improve the efficiency of credit markets, and ensure better institutional indicators in order to increase private investment.


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