Review of Economics and Development Studies Vol. 4, No 1, June 2018

Volume and Issues Obtainable at Center for Sustainability Research and Consultancy

Review of Economics and Development Studies
ISSN:2519-9692 ISSN (E): 2519-9706

Volume 4: No. 1, June 2018

Journal homepage: www.publishing.globalcsrc.org/reads

Institutional Quality, School Enrolment and Mobile Subscribers in Economic

Community of West African States (ECOWAS-5): Impact on FDI using Panel Data

1
Zulaiha A. Zubair,

2
Hussin Abdullah

1
School of Economics, Finance and Banking, Universiti Utara, Malaysia.

2
Universiti Utara Malaysia

ARTICLEDETAILS ABSTRACT

History

Revised format: May 2018

AvailableOnline: June 2018

Basically, the quality of institution, human capital (schoolenrolment) and

infrastructure (mobile subscribers) are significant determinants of foreign

direct investment (FDI). With exception of few studies on corruption,

however, empirical research on the link between infrastructure, human

capital and FDI remain limited. Particularly in the context of Economic

Community of West African States (ECOWAS). This paper aims to

examine the linkage between infrastructure (mobile subscribers,

corruption, schoolenrolment), and Foreign Direct Investment (FDI) among

selected ECOWAS countries using panel data techniques for the period of

1990-2015. The methodology carried out to achieve this objective involves

the panel unit root, panel cointegration and fully modified ordinary least

square (FMOLS). The result indicates that, there is long run relationship

among the series. Corruption and infrastructure are negatively significantly

related with FDI at the long run in the selected ECOWAS countries. The

empirical evidence indicates that feeble level of institutions (corruption)

and infrastructure impedes FDI inflows in the selected ECOWAS

countries. The results confirm that FDI enhancement through role of

institution, school enrolment and infrastructure (mobile subscribers) exist

not only in the transition nation but also in the selected ECOWAS

countries.

NonCommercial 4.0

Keywords

Foreign Direct Investment,

Human Capital, School

Enrolment, Infrastructure,

Mobile Subscribers, Economic

Growth

JEL Classification

F21, C34, F43, O16.

Corresponding author’s email address: Zub7777az@gmail.com

Recommended citation: Zubair, Z.A., Abdullah, A., (2018). Institutional Quality, School Enrolment and Mobile

Subscribers in Economic Community of West African States (ECOWAS-5): Impact on FDI using Panel Data.

Review of Economics and Development Studies, 4 (1) 39-49

DOI: 10.26710/reads.v4i1.279

1. Introduction

Institutional quality attributes which include freedom of economic activities and prudency of countries’

governance are acceptable determinants of Foreign Direct Investment (FDI). The multinational

corporations (MNCs) steadily move from market-seeking FDI and resource-seeking FDI to efficiency-

seeking FDI due to these factors (Dunning, 2002). The inflow of FDI is definitely perverse in Africa due

to immense poverty while domestic savings and income continue to be low (Shahbaz&Rahman, 2010).

These elements are linked with the reinforcing flows of foreign aid, the slightest advantage of Africa in

world business and the mass volatility of capital flow that quickly signal for the compelling need to

enhance the right type of FDI (Afolabi&Bakar, 2016).

http://www.publishing.globalcsrc.org/reads
mailto:Zub7777az@gmail.com

Review of Economics and Development Studies Vol. 4, No 1, June 2018

However, with rising importance of FDI, the west African countriesneed to learn to attractFDI

potentially(Rjoub, Aga, AbuAlrub& Bien, 2017; Dupasquier and Osakwe, 2003; Anyanwu, 2006;

Azman-Saini, Baharomshah and Law, 2010). These studies further reveal that FDI exhibit a greater

achievement in the economic development process i.e. domestic savings support, creation of

employment and growth, assimilation into the global economy, adoption and adaptation of modern

technologies, improvement of competitiveness, advancement of local suppliers, and promoting skills of

local labour force (Azam& Ahmed,2015;Azam&Gavrila,2015).

The ECOWAS region comprises of 15 countries with a population of over 300 million and the countries

are priviledged with natural resources such as oil, gas and minerals in commercial quantity.

Notwithstanding, the inflow of FDI to Africa recently shows less inflow to developing nations including

ECOWAS. Africa’sFDI inflow revived from $2.2billion in 1980 to $15 billion in 2004 and eventually

stood at $54 billion in 2015. Africa’s percentage in addition to ECOWAS world flows declined from

2.3% in 1980 to 1.5% in 2004 and also declined more by 7% in 2014 (UNCTAD, 2015).The interminable

downturn of the inflow poses a critical menace to ECOWAS countries’ economy. The quality of

infrastructure in respect of i.e: transportation, power intencity, mobile suscribersposes a serious issue to

assemblying manufacturing and service as well as minimizes the cost of business transaction (Regional

Outlook report, 2014) Moreover, profitable and productive as well as intriguing investors will consider

decrease in administrative hindrances, boost of both tangible and human capital ( Regional Outlook

report,2014). Thus there is necessity to examine the role of above traditional determinants of FDI. World

Bank (2000) examined that around $2 trillion is wasted yearly due to fraud and misdeed, which

accumulates to around 5% of GDP globally.

According to the Global Financial Integrity (GFI), sub-Saharan Africa along with ECOWAS nations

faced huge loss due to illicit capital outflow which is leveledat around4.0% of GDP (Zubair, Nor’Aznin,

&Azam, 2017). However, the spurious misinformation of trade operations recorded to be the largest part

of financial illicit outflow from developing nations. This represents 83.4% of all flows illicitly (Zubair,

Nor’Aznin, &Azam, 2017).Apart from the acceptance of the impact of openness in attracting FDI

inflows, several authors underlined the influence of other policy variables i.e.quality of infrastructure

and the stability of macroeconomics as determinants of FDI inflow (Rjoub, Aga, AbuAlrub& Bien, 2017;

Gol and Kashani, 2012; Antras and Helpman, 2004).

Thebottomline is that, this paper adds to the frontier of knowledge in a number of ways. First, it is an

addition to the existing literatures on the impact of institutions, human capital (school enrolment) and

infrastructure (mobile subscribers) on FDI. The limited inflows of FDI especially in the context of

ECOWAS region are examined with the use of panel time series methodology. This has added another

dimension to the present study. Second, this paper employs institutional quality variable (corruption) in

the examination of target and source countries in order to take both pull and push factors into account. For

instance, a lower level of corruption in ECOWAS’ nations, could be a source of attraction for the MNCs,

but a higher level of corruption in the source nations could be a source of repulsion (Rjoub, Aga,

AbuAlrub& Bien, 2017).

This study also explores the impact of corruption,schoolenrolmentand mobile subscribers on FDI of the

selected ECOWAS countries from 1990-2015 with the use of panel data. The rest of this paper elaborate

the theoretical and empirical literature and elaborates methodology and data for theempirical analysis. The

last section namely results discusses analysis of findings and theirimplications for policy.

Review of Economics and Development Studies Vol. 4, No 1, June 2018

2. Literature Review

FDI is a crucial element to economic growth and development,especifically in view that, it is the vital

driver of the technology transfer and competitiveness (Rjoub, Aga, AbuAlrub& Bien, 2017).Since FDI

contributes to creation of jobs and economic growth which will indirectly reduce poverty, especially in

relation to income. Therefore, this income will be used by states to finance infrastructure and

development of services. Specifically, most of the benefits of these income can be direct and

indirect.Corporate income which companies paid to state and natural resource sector revenue from FDI,

all constitute the direct income, while the income that improve the tax base at all overall level is viewed as

indirect income.Moreover,the research conducted by Chen and Hambright(2016) explored the same in

their study onChina.

Notwithstanding, as corruption spread all over the world, it is a disturbing policy interest of the

government because,the corruption increases cost of doing business (Zubair et al. 2017). The outcome of

the investigation on FDI flow from US to Africa by Nnadozie and Osili (2004) revealed, that the

performance of infrastructural quality on FDI is significantly low. Evidence from Anyanwu and

Erhijakpor (2004) testified that, mobile infrastructures, GDP and trade openness extremely increase

inflow of FDI into Africa as against, export processing zones, capital gains tax and credit to the private

sector which are negatively significant. Presentations by Sekkat and Veganzones-Varoudakis (2007)

signified that, infrastructural quality, trade openness and robust political and economic situations are

essential for South Asia, Africa, and the Middle East in alluring FDI (Iamsiraroj, 2016).Oladipo (2008)

explored the principles of Nigeria’s FDI inflow from 1970-2005 and revealed that, potential market size,

the degree of export orientation, administering and enabling environment toward the contribution of

infrastructural quality, human capital, and ensuring macroeconomy stability are vital principles of inflow

of FDI (Iamsiraroj, 2016).The justification of infrastructural quality,competent infrastructure is

recommended to re-enforce new technologies and to ease correlation amidst domestic firms and FDI

(Busse, Erdogan, &Mühlen, 2016; Iamsiraroj, 2016).

Furthermore, corruption boost apprehension, as long as corruption accessions are not reinforced in the

courts of law.Foreign investors would aim to avert venturing into business in countries with immense

corruption. However, a positive effect of corruption on inflow of FDImay exist. Bearing in mind

thedifficulty in regulation and bureaucratic flaws, corruption may surpass efficient bureaucracy by aiding

the procedure of decision making (Bardhan, 1997; Iamsiraroj, 2016). In the study of Azam and Lukman

(2010), Azam (2010) and Azam and Emirullah (2014) they indicated that trade openness, infrastructure,

inflation, urbanization, human capital, corruption, market size and political stability are the most vital

factors of the inflow of FDI.

According to Kumar (2001), testing a particular yardstick for infrastructure as well as corruption index in

inflow of FDI modelling, can not only capture the actual impact but combing other variables like real

exchange rate and interest rate (Zubair&Aladejare, 2017). Kenya, Obwona and Egesa (2004) indicated

that, productive and appealing investors have not been eager to invest in Uganda due to lack of quality

infrastructure , technological knowhow and the land locked nature of the Uganda.In the study of Morisset

(2000), he concluded that, good infrastructural quality and well boosted human capital in Mali and

Mozambique brought a major breakthrough in FDI.

3. Methodology and Data

The Model Specification

To determine the framework given ahead and the set up of ECOWAS, with the variation of FDI inflow in

Africa.The following estimating technique was used for institutional Development and mobile

Review of Economics and Development Studies Vol. 4, No 1, June 2018

subscribers in ECOWAS-5 (Nigeria, Ghana, Togo, Senegal and Cote d I voire ).

𝐹𝐷𝐼𝑖𝑡 = 𝛽0 + 𝛽1 𝐼𝑛𝑓𝑟𝑎 𝑖𝑡 + 𝛽2 𝐺𝑃𝑃𝑃𝐶 𝑖𝑡 + 𝛽3 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑡 + 𝛽4 𝑅𝐸𝐸𝑅 𝑖𝑡
+ 𝛽5 𝑇𝑟𝑎𝑑𝑒 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠 𝑖𝑡 + 𝛽6 𝐶𝑜𝑟𝑟 𝑖𝑡 + + 𝛽7 𝑆𝑐ℎ𝑜𝑜𝑙𝑒𝑛𝑟𝑜𝑙 𝑖𝑡 + 𝜇𝑖𝑡

where i denote countries, t denotes time, and the variables are defined as:

• FDIij denotes the net FDI inflows as % of GDP,

• Infrastructure is fixed and mobile subscribers (per 1000 people)

• GDPPC is gross domestic product per capita (US$),

• Human capital is Schoolenrolment,

• Inflation is the annual inflation rate,

• Exchange Rate is the official exchange rate to the US$ (annual average),

• Openness is openness index - total trade (% of GDP),

• Corro denotes Corruption perception Index

• β is a vector of coefficients, and

• εij represents the myriad other influences on FDI, assumed to be well behaved.

Precise observation on Vector X as the determinants of the inflow of FDI in ECOWAS countries

identifies quality of Infrastructure as important factor. Sekkat and Veganzones-Varoudakis (2007)

asserted that the underpinning factorfor FDI inflows in emerging economies is infrastructural

development.As intermediary to this variable subscribers of mobile lines as well as main mobile lines per

1000 persons was used (Calderon and Serven, 2008, Busse, Erdogan, &Mühlen, 2016; Khadaroo and

Seetanah, 2007). Invariably infrastructural development like Information and Communication Technology

are now penetrating in accommodating regional producers into alluring vertical FDI in manufacturing and

sevicesas well as communication chain (Addison and Heshmati,2003). The study by Kinoshita and

Campos (2003) authenticated that acceptable and reputable Infrastructuresare paramount predicament for

foreign investors to accomplish victoriously, heedless of the type of FDI. The adoption of main telephone

lines is because of its necessity in empowering connection between host country and foreign investors.

Nelson and Phelps (1966) argued that for a nation to experience a long run sustainable economic growth,

it will depend on the stock of well educated labour that is able to comprehend cutting edge technology and

introduced absorptive capacity, which are innovatively productive. Furthermore, the new growth theory

highlights the significant impact of human capital build-up, to justify output growth rate which includes

investment in human capital and also regarded to as a critical component of long run economic growth. In

addition,, the endogenous growth theory, human capital are regarded to as a key determinant of economic

growth (Akinlo,004; Benhabib and Spiegel, 1994 ; Mankiw, Romer and Weil, 1992; Barro and Sala-i-

Martin ,2004) further stressed the significance of human capital to growth in developing and developed

nations. For the purpose of this study, schoolenrolment was used to represent human capital.

Gross domestic product per capita: . Absolutely, a large level of “credit to sectors that are private” is a

gesture of domestic capital that is abundant (Busse, Erdogan, &Mühlen, 2016). Kinda (2010) Huge

domiciliary credit to the private sector, likewise entails the degree of domestic capital.Similarly, foreign

capital in the pattern of FDI would not be needed. Positioned by earlier studies, this paper used gross

domestic product per capita (US$) as proxy for Domestic Income per person. Fernández-Arias and

Hausmann (2000) established the interconnection among private credit and foreign capital in the inflows

of FDI.

Inflation and exchange rate: These studies used Inflation as an index of macroeconomic instability

(Busse, Erdogan, &Mühlen, 2016; Buckley, Clegg, & Wang, 2007,Zubair & Aladejare,2017) inferred

that, strong macroeconomic condition supports FDI by displaying low investment liability. Huge real

exchange rate expense proportionate to the US dollar, and that entails an undervalue currency, will allure

more FDI in the time overturn basically deter foreign investment. That is why, exchange rate lead us to

Review of Economics and Development Studies Vol. 4, No 1, June 2018

decompose the aftereffect of comparative wealth and proximate labor outlay on FDI inflow (Busse,

Erdogan, &Mühlen, 2016). Hence, a reduction of a country’s exchange rate will spur the comparative

wealth of foreign firms and allow more foreign acquisition of domestic assets. Supplementarily, a

reduction of a country’s rate of foreign exchange will allow capital inflow, as foreign economies

endeavour to accept advantage of approximately economical domestic labor. This paper utilizes annual

inflation rate as a proxy for inflation.

Trade openness: The result of trade openness is an objective for investmentpattern(Zubair,2017). Previous

researchers have determined negative outcome of trade openness on FDI inflow, that is market-seeking.

The rationale is that, the tariff jumping principle which specify that MNCs that pursue to work for local

markets can resolve to establish subdivision in the host economy.It is, challenging for them to import

produce into their economies hence, generate capital inflows toward the aforesaid country

(Mijiyawa,2012, Anyanwu, 2012).Some studies revealed that, countries that are unhindered for foreign

investment earned higher FDI (Asiedu (2002), Noorbakhsh et al. (2001), Morisset (2000), Aizenman and

Noy (2006), and Anyanwu (2012). In these paper total trade as a % of GDP to proxy openness to trade.

Corruption: A balance in the existance of an advantageous climate in a macroeconomic sense, corruption

and policy making rules can impede international business men from putting in their interest in an

economy (Rivlin, 2001, p.191). Aside from boosting the gain of accomplishing investment, corruption

lags the procedure of attaining the business license mandatory for running business in the foreign country.

Time-series indexs for corruption for many developing countries are very scares. Transparency

International inaugurate the compilation of data on corruption by 1995, though the World Bank’s

indicator for Institute’s governance are accessible for the period 1996-2002 .This paper used GDP % of

government expenditure to proxy corruption and policy making rules. The basis for applying this

measure is that, a large number of government officials generate advantage for abuse of treasure by their

officials.

This paper utilises Secondary data also employ time series formula to form a break even data for panel

from 1990 to 2015. The panel is annual data for the inflow of FDI for West Africa from ECOWAS-5

countries.The compilations of the data are accumulated and authenticated from distinct basis i.e.,

Direction of Trade Statistics, and World Development Indicators, International Financial Statistics by

International Monetary Fund (IMF), and political rating group (PRSG).

4 Findings and Discussion
4.1 Panel Unit Root
The outcome of the panel unit root tests conducted for the variables (GDP per capita, FDI, Corruption,

Reer, Infrastructure Quality, human capital(schoolenrolment), Inflation and Trade openness).Looking at

Table 4.1 below, the variables show non-stationary at levels. Therefore, Levin, Lin and Chin unit root, as

well as Im, Pesaran and Shin were tested again for the variables at first differenced. The outcome

indicated the variables are stationary at I (1).

Table 4.1

Panel Unit Root Test

Level

First Difference

Levin-Lin-Chu Im-Pesaran-

Shin

Levin-Lin-Chu Im-Pesaran-Shin

Variables Statistic Statistic
FDIinflow -0.3846 -0.8867 -6.3674*** -5.0888***
Gdppercapita 2.7359 -1.2912 -4.5411*** -4.1395***

Review of Economics and Development Studies Vol. 4, No 1, June 2018

Tradeopenness 2.0490 -0.5863 -6.3319*** -2.2305**
Reer -1.1123 -1.1123 -3.3667*** -3.3667***
Inflation

HC(Schoolenrol)
-0.6944

-0.2966

-0.9502

-4.6679***

-6.5325***

-1.2585*

-6.5246***

-5.5677***

Corruption 1.1242 1.1242 -4.0424*** -2.4456**
Infrast(mobile

subcribers)
0.7391 -1.0281 -4.9454*** -2.3139**

Notes, ***, ** and * indicate the rejection of the null hypothesis at 1%, 5% and 10% significant level

respectively.

4.2 Panel Cointegration Test for heterogeneous panels
The hypothetical panel technique showed in table 4.2 pick up the analysis of cointegration result among

the variables after the use of pedroni technique. Four of the seven tests repudiate the null hypothesis of

no-cointegration after the use of ADF group test and Phillips-Perron. Accordingly, the panel technique

indicated that, there is cointegration between the variables employing 5 ECOWAS nations. Conclusively,

there is statistical evidence for the determinant of FDI in ECOWAS-5 nations. Nonetheless, provided the

variables are basically interelated at the longrun for the determinants of FDI hence, fully modified OLS

will be examined to check more for long run interrelation among the variables (Pedroni, 1997,

2000,2004).

Table 4.2

Panel cointegration tests for heterogeneous panel

Statistics Value

Panel v-Statistic -0.981

Panel rho-Statistic 0.289

Panel PP-Statistic -2.491**

Panel ADF-Statistic -2.289**

Group rho-Statistic 0.944

Group PP-Statistic -3.669***

Group ADF-Statistic -2.883**
Notes: All statistics are taken from pedroni (1999), *** and ** specifies the rejection of the null hypothesis of no-cointegration

at 1% and 5% significance level.

4.3 Discussion of the result
GDP was made part of FDI determinants pattern to measure market size. The outcome in table 4.3 point

out that, a percentage increase in GDP per capita spur the inflow of FDI by 2.76 per cent. The compelling

and positive interrelation embodying GDP and FDI testify that, foreign nations market size is a

determinant of inflow in ECOWAS-5.The outcome is in line with Liargova and Skandalis (2012) Frankel

et.al (2004.

This implies that, GDP or in other words the market size plays an important role for FDI inflow to the five

ECOWAS countries, which aligned with Hymer, Dunning’s eclectic role OLI paradigm theory and

UNCTAD framework that firms look for larger prospects when opting for FDI decisions (market–seeking

FDI motive), which is mainly to serve and meet demand of large population within five ECOWAS

nations. Furthermore, infrastructure development and FDI inflow show a positive and significant

relationship. The result indicates that one per cent increase in infrastructure development will lead to more

FDI inflow. This finding is in line with Aseidu (2002). This indicate the significance of well- developed

infrastructure(mobile subscribers) in reducing costs and increasing efficiency and effectiveness in order to

stimulate FDI into the selected five ECOWAS countries, which is in line with the UNCTAD theory and

framework by Hymer(1977).

Review of Economics and Development Studies Vol. 4, No 1, June 2018

Table 4.3

FDI determinants Model of Long run estimates (FMOLS)

Variables Coefficient P-Value

Infrastructure -0.010** 0.0023

Gdp per capita 2.76** 0.0198

Inflation

HC(Schoolenrol)

0.001**

0.006***

0.0598

0.017

Reer 1.84 0.6058

Trade openness -0.010 0.2859

Corruption -0.007** 0.0107

Adj R-squared 0.873

Notes: ***,**& * significance level at 1%,5% and 10%.

Moreover, the coefficient of corruption (institutional quality) shows a negative sign and was statistically

significant. The negative coefficient of corruption variable for the selected ECOWAS countries implies

that if selected ECOWAS countries corruption perception index on average were to improve by one per

cent FDI determinant will increase by 0.007%. This signifies the importance of institutional quality

(corruption). This result is in line with corruption perception index submission which indicates that

ECOWAS region is the most corrupt region in the world.

Similarly, the dominant view which indicate that governance which is good and highly commendable

tend to concede higher FDI (Laporta et al. and World Bank 2002,Shapiro and Tang, 2004; Gani, 2007)

However, rise in insecurity and high spending are primarily induced by poor governance (Cuervo-

Cazurra, 2008) Due to the fact that, investments cannot be protected in an environment that is riddled

with poor governance (Globerman and Shapiro, 2003). In conclusion, corruption tends to increase direct

costs in form of delay in bureaucracy and bribery which create artificial bottlenecks in order to create

more accommodating conditions for rent seeking activities.

The result revealed school enrolment is significantly positive denoting a surge in economic growth by

0.006% units will spur school enrolment (human capital)The new growth theory justify the significant

contribution of human capital accumulation in order to sustain output growth which includes investment

in human capital as a significant factor for long run economic growth. Mainly in the literature negative

coefficient estimate for human capital on economic growth is very common (Islam, 1995; Benhabib and

Spiegel 1994; Pritchett 2001)The findings for inflation rate is significantly positive implying inflation

variable increased by 1% consequently, FDI inward tend to increase by 0.001%.

5. Conclusion

This study used FMOLS technique, to explore the interlock between infrastructure(mobile subscribers),

corruption(institutional quality) and human capital(school enrollment) for the inflow of FDI among

ECOWAS-5 nations. The findings revealed that,corruption(institutional quality),human capital(school

enrollment) and infrastructure(mobile subscribers) and FDI are statistically significant for long run

purpose and good infrastructural quality(mobile subscribers) is having statistically positive association

with FDI.

However, FDI is assumed to be negatively related to corruption in the selected ECOWAS countries. The

study established long run association with infrastructure (mobile subscribers), corruption and FDI in the

ECOWAS countries. The findings for Corruption and FDI revealed a percentage change in Corruption,

will lead to about 0.007decrease in FDI. Moreover, the significant aftereffect of corruption, mobile

subscribers and school enrollment on FDI in the long run implies that, international investors are driven

Review of Economics and Development Studies Vol. 4, No 1, June 2018

by future expectations of profitability, good educational system, adequate infrastructural facilities and free

corrupt society.

Government need to provide a balanced and secured macroeconomic framework, boost amassment of

human capital, accelerate privatization procedure, enhance business climate and expand predictability by

taking measures to aggress bureaucracy and corruption for economic growth. Additionally, a steady

anticorruption strategic viewpoint should be sustained and also there should be declaration on the

disadvantageous ramification that corruption impacts on variables that are not growth productive, and not

withstanding vital for viable, unbiased, and perfect economic progression.

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