Country-Level corporate governance and Foreign Portfolio Investments in Sub-Saharan Africa: The moderating role of institutional quality

Abstract

Given the declining volumes of Foreign Portfolio Investments (FPI) in Africa, the study sought to examine the moderating role institutional quality (INST) plays in the relationship between country-level corporate governance (CG) and FPI in Sub-Saharan Africa. This is motivated by arguments from the hierarchy of institutions hypothesis, which posits that the quality of political institutions (INST) determine the strength of economic institutions (CG) and how they affect economic activities. Data was collected on 33 SSA countries from 2009 to 2017 and analysed using the systems GMM approach. The results revealed that economies characterised by strict adherence to international auditing and reporting standards, ethically behaved firms, effective corporate boards, and well-regulated security markets tend to attract more FPI inflows, even though weak shareholder protection regimes are likely to deter FPI. We also confirmed the positive impact of robust institutions in luring FPI into SSA. Finally, we found the FPI-CG nexus to be significantly moderated by the quality of institutions prevalent in a country. This implies that the effectiveness of country-level corporate governance mechanisms can be affected by the existing institutions, thereby impacting the level of FPI an economy receives. We recommend that SSA firms take pragmatic steps to develop and practice sound CG mechanisms while the institutional setting in SSA is strengthened to harness more FPI inflows to support their economic growth agenda.

Keywords:

• Country-level corporate governance
• Foreign Portfolio Investments
• institutional quality
• institutions
• sub-Saharan Africa

PUBLIC INTEREST STATEMENT

The governance-foreign investment nexus has generally received scholarly attention; however, how specific country-level corporate governance mechanisms influence FPI inflows is limited in the literature. Moreover, the role political institutions could play to strengthen the relationship has also not received any attention. Following the hierarchy of institutions hypothesis, the study obtained data on 33 SSA countries to examine the moderating role institutional quality plays in the relationship between country-level corporate governance and FPI inflows into SSA. The study found that sound country-level corporate governance mechanisms and quality institutions are major drivers of FPI. Again, the study concludes that the Governance—FPI relationship is strengthened by the quality of institutional structures prevalent in a country. The study therefore recommends that firms adopt sound corporate governance practices while SSA countries also work to strengthen their institutions to harness attract more FPI inflows into the region.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Samuel Kwaku Agyei

Dr. Samuel Kwaku Agyei is a chartered accountant, senior lecturer with the Department of Finance and the Vice Dean at the School of Business, University of Cape Coast, Ghana. Professor John Gatsi is a chartered economist and the Dean of the School of Business, University of Cape Coast, Ghana. Dr. Mohammed Zangina Isshaq is also a senior lecturer with the Accounting Department of the University of Ghana Business School, Accra, Ghana. Mr. Nathaniel Kwapong Obuobi, Mr. Mac Abeka Junior and Mr. Ebenezer Boateng are researchers with the Department of Finance, School of Business, University of Cape Coast. Mr. Emmanuel Kwakye Amoah is an assistant lecturer at the Regentropfen College of Applied Sciences. The authors have published related peer reviewed articles in highly revered international journals.