The Effect of Budget Transparency on Foreign Direct Investment in Africa: The Role of Institutional Quality

Abstract This study investigates the effect of budget transparency on foreign direct investment (FDI) inflows in Africa, with a particular focus on the moderating and threshold effects of institutional quality. Guided by Institutional and Agency theories, the study posits that fiscal transparency influences investment decisions not in isolation but through its interaction with governance structures. Using a quantitative research approach, the study applies a dynamic panel design covering 35 SSA countries from 2010 to 2023. The estimation is conducted using the two-step System Generalized Method of Moments (GMM) to address endogeneity concerns and account for persistence in FDI. Seo et al (2019) dynamic threshold Model further explores nonlinear effects of institutional quality. The findings reveal that budget transparency positively affects FDI inflows, but this effect is significantly amplified only when institutional indicators such as voice and accountability, political stability, and government effectiveness, exceed defined thresholds. In weaker institutional environments, transparency alone is insufficient and may even deter investment by exposing governance risks. The results emphasize the importance of credible institutions in converting fiscal openness into investor confidence. Based on these insights, the study recommends targeted and sequenced transparency reforms, capacity-building in public institutions, enhanced citizen engagement, and continuous monitoring of transparency outcomes. The study contributes to literature on public financial management and investment dynamics in developing regions, offering guidance for policymakers seeking to attract long-term, quality investment through improved fiscal governance.