Foreign direct investment, institutional quality and innovation: insight from African countries

Purpose Despite the initiatives taken to attract foreign direct investment (FDI) to transfer technology and skills to enable economic growth, Africa has remained a low performer in the global innovation index. This study aims to determine the effects of FDI and institutional quality on innovation in Africa. Design/methodology/approach A panel data set of 22 countries was obtained from the World Bank development indicator database. Various statistical tools, such as stationary tests, panel cointegration and regression models have been deployed to support the analysis. Findings The results show that FDI has a positive and significant effect on innovation under the fully modified ordinary least squares, generalized method of moments and fixed effects Driscoll and Kraay estimation techniques. In addition, industrialization, trade openness and urbanization were found to be essential drivers of innovation. Gross domestic product and government effectiveness (a measure of institutional quality) had a negative and significant effect on innovation. Research limitations/implications This study provides insightful findings for policy reform pertaining to foreign investment. A holistic policy strategy is essential for realizing the optimal benefit from FDI. Owing to a significant amount of missing data prevalent in the database used for the analysis, only 22 countries were included. Originality/value To the best of the authors’ knowledge, this study is the first to address the role of FDI inflow and institutional quality in promoting national innovation in the African context. It also opens a door for further studies in this emerging research area.