Empirical Analysis Of The Effect Of Foreign Direct Investment On Health Status In Sub-Saharan Africa: What Role For Governance?

1. INTRODUCTION

The objective of both national and international development is to improve population health. The region still maintains high maternal and infant/child mortality rates today in comparison to other parts of the world, despite recent success in lowering mortality levels generally and, more specifically, in Sub-Saharan Africa (WHO, 2018). The newborn and child mortality rate in 2018 was 78 deaths per 1,000 live births, according to data from the World Bank database (WDI, 20), compared to 4.03 and 38.8 deaths per 1,000 live births for the European Union and the world, respectively. According to the (WHO, 2018) report, the region is characterized by fragile health systems with insufficient financial and human resources, unavailability of health services, especially in rural areas, and inadequate health infrastructure. According to Boachie & Ramu 2016), health spending is the means for governments to invest in health. Similarly, the literature has emphasized the importance of health as a capital that requires investment to maintain (Grossman, 1972; Mushkin, 1962). In general, investment is considered one of the main drivers of economic growth and development. However, local investment alone may not be sufficient to ensure sustainable growth and development. For this reason, governments, especially those of developing countries, have developed several strategies to attract more FDI (Immurana, 2021). According to statistics of UNCTAD (2018) and UNCTAD (2019), FDI inflows to developing economies were $646 billion and $671 billion in 2016 and 2017, respectively, which increased by 2% in 2018, while developing countries share of global FDI increased from 47% in 2017 to 54% in 2018. In Africa, FDI flows rose from $41.8 billion in 2017 to $46 billion in 2018, an increase of 10.05%. FDI is essential for developing countries, especially for Sub-Saharan African countries, given the growing need for additional foreign capital to achieve sustainable development goals. However, in order to attract foreign capital, these countries need to improve governance indicators because, according to (Outreville, 2007), the quality of governance is a determinant of FDI and has a significant effect on the choice of countries by these companies. Thus, good governance is relevant in explaining the most preferred locations for multinationals to establish subsidiaries abroad (Outreville, 2007). The importance of good governance in improving health outcomes has also been demonstrated in studies by Makuta & O'Hare (2015) and Farag et al., (2013). These studies showed that health is better in countries with better governance indicators, and governance improves the effect of public health spending on health outcomes.

However, in the literature, most empirical studies (Abbes et al., 2015; Abdouli & Hammami, 2017; Bermejo Carbonell & Werner, 2018; Iamsiraroj, 2016) have largely focused on the effect of FDI on economic growth, with very few studies (Alam et al., 2016; Burns et al., 2017; Nagel et al., 2015) conducted on the effect of FDI on health outcomes. However, the debate around the effect of FDI on health remains debatable. Increased income due to FDI may increase spending on health determinants, such as improved medical care and provision of clean water and sanitation infrastructure. In addition, direct FDI in the healthcare sector can increase the supply of medical goods and services, leading to lower prices and, thus, increased demand for medical goods and services (Nagel et al., 2015; Outreville, 2007). This could result in better health outcomes. However, FDI directed at certain sectors, especially mining or forestry, may have a negative effect on health through environmental degradation (Immurana, 2021). Similarly, the repatriation of profits from foreign companies can negatively affect economic growth and worsen the country's socioeconomic conditions (Agosin & Machado, 2005).

The importance of this study stems from the fact that the empirical literature on the effects of FDI has focused much more on the benefits that host economies can derive from it in terms of growth and income (Herzer & Nunnenkamp, 2012). The welfare effects of FDI, especially on the quality of life, such as health conditions, have been partially discussed (Immurana, 2021; Outreville, 2007). Yet the choice of foreign investors is often guided by the quality of the workforce and governance (Azemar & Desbordes, 2009). According to Herzer & Nunnenkamp (2012), FDI could help improve health status if foreign investors paid higher wages than domestic firms and provided employees with better social services and safer workplaces. In addition to these direct effects, there may be indirect health effects from FDI-induced growth as higher average incomes lead to increased demand for health care (Bloom et al., 2018). With sub-Saharan Africa facing poor health outcomes, it would be imperative to study the actual effect of FDI on the health status of populations in the wake of strategies to attract FDI. The remainder of the study is organized as follows. First, we briefly overview the literature and discuss the methodology. Second, we present and discuss the estimation results, and the last section shows the conclusion followed by policy implications.

2. LITERATURE REVIEW

BRIEF OVERVIEW OF THE EFFECT OF FDI ON HEALTH

The literature on the role of FDI suggests that FDI is an important source of capital that complements domestic private investment and contributes to economic development and technology transfer (Outreville, 2007). The availability of private capital thus helps reduce the total burden on government resources. Many studies have shown that FDI promotes economic growth, wage increases, and overall improvements in working conditions in low- and middle-income countries (Blouin et al., 2009). In developing countries, where access to health care is highly dependent on the ability to pay, FDI may or may not be associated with population health.

However, regarding the effect of FDI on health, Immurana (2021) shows in his study that FDI significantly improves health in African countries. Herzer & Nunnenkamp (2012) studied the effect of FDI on life expectancy at birth in a sample of 14 developed countries from 1970 to 2009. The study found that FDI negatively affects life expectancy over a sample of selected countries. On the other hand, Nagel et al. (2015) showed the effect of FDI on population health status measured by infant mortality rate and life expectancy in 179 countries over the period 1980 to 2011. The fixed effect model estimation was used to obtain the results. The results showed that FDI positively influences health in low-income countries and negatively influences health in high-income countries.

Azemar & Desbordes (2009) conducted a study of 70 developing countries over the period 1985-2004 to analyze the relationship between governance, FDI, and health using a fixed-effects model. They conclude that an integrated health policy could have increased FDI flows and contributed to economic growth in these developing countries. These results show the importance of governance, including institutional quality, in the relationship between FDI and health. Golkhandan (2017) studied the long-term relationship between FDI and health indicators. The study included 25 developing countries covering the period from 1995 to 2014 and concluded that there is a positive relationship between FDI and health status if FDI is facilitated in host countries.

Alam et al. (2016), in a study on Pakistan covering the period from 1972 to 2013, found that FDI increased long-term life expectancy. In addition, FDI was found to positively increase short-term life expectancy. Studies by Asiedu et al. (2015) and Ghosh& Renna (2015) found the same results. The same is true in a related study, Burns et al. (2017) examined the relationship between FDI and health status in 85 low- and middle-income countries from 1974 to 2012 using the instrumental variables approach. The study found that FDI increases life expectancy and reduces adult mortality rates. Thus, there is also ambiguity regarding the potentially negative health effects of FDI (Herzer & Nunnenkamp, 2012). In addition, global financial integration and global competition for FDI flows are found to limit the ability of governments to provide public goods. Figure 1 shows the conceptual framework of the relationship between FDI and population health. This figure shows the channels through which FDI can directly or indirectly affect population health status or health outcomes.

Figure 1.Conceptual framework of the relationship between FDI and population healthSource: Author, Adapted from (Immurana, 2021)

The literature shows that very few studies have been devoted to analyzing the effect of FDI on health outcomes (Siddique et al., 2021), and very few studies have analyzed this relationship in the context of Sub-Saharan African countries that attract FDI flows (Azemar & Desbordes, 2009; Immurana, 2021). It is therefore important to analyze the role of governance in the relationship between FDI and health status in Sub-Saharan Africa because, on the one hand, recent years have been marked by a renewed interest in the consequences of governance and poor governance on economic development and, on the other hand, governance is a key determinant of country choice for FDI.

3. METHODOLOGY

3.1. Data and Model

The dataset comes mainly from the World Bank database (WDI, 2019). A sample of 44 Sub-Saharan African countries (TABE 1) was defined, for which we use annual observations covering the period from 2002 to 2019.

N O Country N O Country N O Country
1 Angola 15 Equatorial Guinea 29 Mauritania
2 Benin 16 Eswatini 30 Mauritus
3 Botswana 17 Ethiopia 31 Mozambique
4 Burkina Faso 18 Gabon 32 Namibia,
5 Burundi 19 Gambia 33 Niger
6 Cameroon 20 Ghana 34 Nigeria
7 Cape Verde 21 Guinea 35 Rwanda
8 Central Africa 22 Guinea Bissau 36 Sao Tomé et Principes
9 Comoros 23 Kenya 37 South Africa
10 Congo (Republic) 24 Lesotho 38 Senegal
11 Congo (Democratic) 25 Liberia 39 Sierra Leone
12 Côte d'Ivoire 26 Madagascar 40 Sudan
13 Chad 27 Mali 41 Tanzania
14 Djibouti 28 Malawi 42 Togo
Table 1.List of countriesSource: World Development Indicator (WDI, 2019)

Based on the conceptual framework defined above and the existing literature on the relationship between FDI and health status discussed above, the general empirical formulation is given as follows:

H = f(FDI, Gov, SEE)(1)

Where H is the health status indicator measured by the infant and child mortality rate (TMIJ); FDI represents foreign direct investment; Gov is the governance indicator, and SEE the vector of socioeconomic and environmental variables. To analyze the role of governance in the relationship between FDI and health, the equation for the interaction model of governance and FDI on health is given as follows:

TMIJ = F(FDI Gov * FDI, SEE)(2)

Where Gov*IDE represents the interaction of governance and public health expenditure indicators, for a more detailed analysis of the effect of governance, we also used two disaggregated indicators of governance, namely, control of corruption and political stability (Stab. Pol), on the one hand, corruption is a global phenomenon that affects all countries in the world (Vian, 2008) and, on the other hand, Sub-Saharan African countries have been experiencing socio-political instability in recent years. However, the methodological approach follows a panel data model for African countries covering the period from 2002 to 2019.

TMIJit = ai + a1FDIit + a2Govit + a3GDPit + a4DPSit + a5Eduit + a6CRPOPit +a7Urbit +it(3)

Where represents the country-specific effect. i and t represent the number of individuals (country) and the period (year), respectively. FDI inflows can generate economic growth and income that would increase the ability of individuals to purchase more health-related goods and services, resulting in good health (Burns et al., 2017; Immurana, 2021). Gov represents the governance indicator. The literature has shown that population health is better in countries with higher governance scores than in countries with low governance scores (Biadgilign et al., 2019). Two indicators of governance, including control of corruption (Corruption) and political stability (Stab. Pol), are also used. DPS represents public health expenditure. DPS is the way governments invest in health with the provision of health infrastructure (Boachie &Ramu, 2016). GDP is gross domestic product per capita in US dollars (Frijters et al., 2005); EDU represents educational attainment as measured by the gross elementary school enrollment rate, The effect of educational attainment on health is widely discussed in the literature (Desai, 2000; Peters et al., 2010); CRPOP indicates the population growth rate per year. Increases in population or level of urbanization may be accompanied by increases in health infrastructure and health personnel, contributing to improved health outcomes (Uprety, 2019). Urb refers to the urbanization rate.

3.2. Analysis of the Descriptive Statistics of the variables

The descriptive statistics of the variables show the heterogeneity in the sample. This disparity is seen in health, where the variation in infant and child mortality rate (TMIJ) from one country to another is about 38 deaths per 1,000 live births. Statistics show that the variability of FDI as a percentage of GDP is 8% from one country to another. The governance indicators are low and average -0.6 points on a scale of (-2.5 to 2.5) for a low and higher governance score, respectively. The other characteristics of the variables are presented in Table 2 below.

Variable Observations Average St. deviation Minimum Maximum
TMIJ 792 90.346 37.807 14.5 213.9
FDI 792 4.759 8.292 -11.199 103.337
Governance 792 -0.617 0.574 -1.719 0.880
Corruption 792 -0.625 0.598 -1.816 1.217
Stab. Pol 792 -0.508 0.864 -2.699 1.200
GDPH 792 2008.514 2856.061 111.927 22942.61
DPS 792 1.610 1.141 0.104 6.047
Educ 638 100.921 22.327 38.326 149.308
CrPop 792 2.506 0.871 -0.616 4.655
Urbanisation 792 40.837 17.508 8.682 89.741
Table 2.Descriptive statistics of variablesSource: Calculated by Author based on WDI (2019) data.

3.2. Estimation Technique

To analyze the effect of FDI and governance on the population’s health status in SSA, the econometric approach is based on a fixed-effects model for a panel of 44 countries in SSA covering the period 2002 to 2019. To control for endogeneity issues, we apply the generalized method of moments (GMM) approach (Arellano & Bond, 1991; Blundell & Bond, 1996). This approach allows for unobserved fixed effects, endogenous independent variables, the presence of heteroskedasticity, and autocorrelation across or within the panel. In its dynamic form, the general model (4) and the interaction model (5) are given as follows:

TMIJit = ai + a1TMIJit + a2FDIit + a3Govit + a4GDPit + a5DPSit + a6Eduit +a7CRPOPit +€it(4)

TMIJit = ai + a1TMIJit-1 + a2FDIit + a3Govit*FDIit + a4GDPit + a5DPSit + a6Eduit +a7CRPOPit + + a7Urbit+it(5)

TMIJitRepresents the lagged variable of the health indicator

4. RESULTS AND DATA ANALYSIS

4.1. Effect of FDI and Governance on Health Status

Table (3) below shows the results of estimating the effect of FDI and governance indicators on health as measured by infant mortality rate and life expectancy at birth. The results show that the lagged infant mortality rate variable (L.TMIJ) coefficient is significant and positive, explaining the dependent nature of mortality over time. The results show a significant effect of FDI on health. For example, a 1% increase in FDI would contribute to a decrease in TMIJ of 0.02%.

Regarding governance, the results show that the quality of governance contributes to an improvement in health status. Thus, an increase in the quality of governance of 1% would contribute to a reduction in infant and child mortality of approximately 2.78%. The same is true for disaggregated indicators of governance. Controlling corruption contributes to a reduction in child mortality of about 2.95%. In addition, improved political stability contributes to a reduction in child mortality by 0.64 percent.

Regarding the socio-economic and environmental variables, the results show a significant effect of the coefficient associated with per capita income. The increase in per capita income contributes to infant and child mortality reduction by about 0.7%. The results also show a significant effect of public health expenditure on health, contributing to a decrease in under-five mortality of 0.5%. In addition, increasing the level of education by 1% would reduce infant and child mortality by about 0.07%.

The results also suggest that increasing the urbanization rate by 1% would reduce mortality by about 0.03%. Similarly, increasing the population growth rate by 1% contributes to a reduction in the level of infant and child mortality by about 0.48%. This result can be explained by the fact that a policy of urbanization and population growth is accompanied by health policies (access to health care, availability of health services, and job creation).

GMM Estimator
VARIABLES Infant and child mortality rate
L.TMIJ 0.844*** 0.839*** 0.844***
(0.00328) (0.00341) (0.00324)
FDI -0.0197** -0.0190** -0.0202***
(0.00771) (0.00785) (0.00776)
LGDPH -0.700*** -0.954*** -0.994***
(0.0682) (0.0705) (0.0710)
DPS -0.514*** -0.422*** -0.813***
(0.0527) (0.0552) (0.0521)
Educ -0.0673*** -0.0717*** -0.0727***
(0.00257) (0.00266) (0.00271)
CrPop -0.481*** -0.703*** -0.197***
(0.0621) (0.0639) (0.0631)
Urbanisation -0.0348*** -0.0345*** -0.0335***
(0.00358) (0.00364) (0.00365)
Governance -2.779***
(0.114)
corruption -2.951***
(0.122)
Stab Pol -0.643***
(0.0642)
Constant 24.21*** 27.16*** 27.85***
(0.821) (0.866) (0.897)
AR(1) Pr > z = 0.005 Pr > z = 0.005 Pr > z = 0.001
AR(2) Pr > z = 0.961 Pr > z = 0.976 Pr > z = 0.699
Test de Sargan Prob > chi2 = 0.174 Prob > chi2 = 0.184 Prob > chi2 = 0.135
Test de Hansen Prob > chi2 = 0.411 Prob > chi2 = 0.362 Prob > chi2 = 0.425
Observations 598 598 598
Number of Id 44 44 44
Table 3.Results of the estimates of the effect of FDI and governance on health status

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Source: Author’s estimate based on WDI2019 data.

4.2. Effect of the Interaction of FDI and Governance on Health Status

Table (4) below shows the effect of the interaction of governance and FDI on health status. Overall, the results show that the quality of governance improves the effect of FDI on the population's health status. This effect will be much larger with the improvement of governance indicators. The results show that the effective use of FDI contributes to the reduction of infant and child mortality by 0.27%. This finding is the same for the disaggregated governance indicators. Controlling corruption in the use of FDI contributes to a reduction in child mortality of 0.27 percent. The same is true for political stability, which allows FDI to reduce infant and child mortality by 0.07%.

GMM Estimator
VARIABLES Infant and child mortality rate
L.TMIJ 0.838*** 0.836*** 0.840***
(0.00353) (0.00361) (0.00334)
FDI -0.206*** -0.216*** -0.0498***
(0.0156) (0.0153) (0.00862)
LGDPH -1.107*** -1.261*** -1.106***
(0.0747) (0.0774) (0.0721)
DPS -0.785*** -0.745*** -0.887***
(0.0546) (0.0554) (0.0521)
Educ -0.0759*** -0.0778*** -0.0782***
(0.00282) (0.00285) (0.00277)
CrPop -0.316*** -0.394*** -0.173***
(0.0668) (0.0675) (0.0642)
Urbanisation -0.0388*** -0.0337*** -0.0387***
(0.00383) (0.00386) (0.00371)
GouvIDE -0.266***
(0.0188)
CorrIDE -0.273***
(0.0175)
StapolIDE -0.0738***
(0.0113)
Constant 30.41*** 31.87*** 30.18***
(0.947) (0.981) (0.916)
AR(1) Pr > z = 0.000 Pr > z = 0.001 Pr > z = 0.001
AR(2) Pr > z = 0.989 Pr > z = 0.869 Pr > z = 0.759
Test de Sargan Prob > chi2 = 0.173 Prob > chi2 = 0.117 Prob > chi2 = 0.114
Test de Hansen Prob > chi2 = 0.288 Prob > chi2 = 0.233 Prob > chi2 = 0.217
Observations 598 598 598
Number of Id 44 44 44
Table 4. Results of the estimates of the effect of the interaction of FDI and governance on health status

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Source: Author’s estimate based on WDI 2019) data.

5. DISCUSSION

The study of the data in the table (2) demonstrates that FDI has a large overall impact on health outcomes. This outcome is in line with what researchers (Burns et al., 2017; Alam et al., 2016) discovered in their studies. This can be explained by the fact that FDI boosts income because more work possibilities result in higher healthcare consumption. Additionally, FDI that is targeted specifically at the health sector might raise the standard of care offered, leading to better health results. Additionally, as part of their social obligations, overseas businesses might take part in health development initiatives like awareness campaigns or immunizations (Immurana, 2021).

The analysis showed the importance of governance in improving the effect of FDI in significantly reducing infant and child mortality in sub-Saharan African countries. Therefore, African governments must design strategies around good governance policies to attract more FDI and improve health indicators. The quality of governance in improving health is crucial. For example, the effective allocation of health resources to targeted goals could significantly affect health outcomes (Farag et al.,2013). For disaggregated governance indicators such as control of corruption and political stability, the effect of the interaction of control of corruption and FDI is much larger because corruption directly affects the efficient use of resources. While political stability indirectly affects health through macroeconomic instability, population displacement, cleavages, and tensions within the population. The result also showed significance for public health spending. This result is consistent with that found in the literature (Arthur & Oaikhenan, 2017; Bein et al., 2017; Kato et al., 2018). Public health spending is being seen as the means for public policymakers to invest in health or boost health sector financing (Boachie & Ramu, 2016). Increased public spending on health would help reduce inequities in care and access to health services; improve the performance of health services and health systems; and improve the quality of health care provision through an increase in the quantity and quality of the health workforce as well as improvements in health infrastructure. Analysis of the results also showed a significant effect of per capita income on the health status of populations. This result is not surprising since economic growth can be accompanied by a large number of employment opportunities and higher incomes, which can increase the ability of individuals to afford health care and other health-enhancing goods and services (Immurana, 2021). This result confirms the important contribution of income on health highlighted in the literature (Filmer & Pritchett, 1999). On the one hand, an increase in income level would allow households to improve their lifestyle, diet, hygiene, and socioeconomic status. On the other hand, increasing the level of growth would allow countries to allocate more resources to the health sector in order to improve the quality of care and reduce health inequalities.

The results also show a significant effect of education on health. This result is consistent with the theoretical literature regarding the effect of education on producing health (Uprety, 2019). Thus, education enables individuals to engage in healthy behaviors (hygiene practices) by becoming effective producers of health. The results are consistent with those found in empirical studies (Desai, 2000). Regarding the level of urbanization, high urbanization accompanied by the provision of sanitation infrastructure, safe water supply, and access to electricity would reduce the risk of morbidity (Bayati et al., 2013). Similarly, population growth or birth policies tend to increase health expenditures in general and public health expenditures in particular. Thus, birth policies must be accompanied by investments in the health sector to improve the efficiency of health systems; otherwise, these policies would contribute to a deterioration in the health status of populations.

6. CONCLUSION

This study looked at the analyzing role of governance in the relationship between FDI and health status as measured by the infant and child mortality rate indicator in Sub-Saharan Africa. The study covered 44 countries in Sub-Saharan Africa covering the period from 2002 to 2019. The results revealed that FDI significantly reduces the baby and child mortality rate in the Sub-saharan Africa region. The results also showed that the quality of governance is one of the attractive factors for FDI. Through this study, we realized that, according to the results, good governance improves the effect of FDI on health outcomes. Moreover, as governance indicators are generally weak in Sub-Saharan African countries, the findings imply that policymakers in these countries should strengthen their efforts to attract more FDI by pursuing strategies to improve the quality of governance in the region. This could help accelerate efforts to achieve MDG 3 for good health and well-being.

7. LIMITATIONS OF THE STUDY AND FUTURE RECOMMENDATIONS

The main limitation of this study is the lack of long-term data for a very good analysis. Finally, as an extension of this study, future complementary research can be directed toward analyzing the role of governance in the relationship between FDI and health in the long run, with a focus on the marginal effect induced by the interaction of governance and FDI on health. Moreover, it would be relevant to analyze the effect of sectoral FDI on health outcomes in order to determine the main channels through which FDI can consistently affect the health of populations. As a policy implication, policymakers can make efforts to include reaching agreements with foreign investors, ensuring reinvestment of accumulated profits, strengthening corporate social responsibility, and providing sufficient skills and technological spillovers that can help improve health indicators.

ACKNOWLEDGEMENT

We thank Professor Agbodji Ega Akoete, Dean of Economics and Management Lecturer in Economics at the University of Lome, for his encouragement to do research.