DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN MALAWI

Abstract

The study provides an empirical assessment of the determinants of FDI in Malawi. This is coming from the background that previously most studies in Malawi have ignored this issue of FDI. But FDI is increasingly becoming a source of growth and development in the SSA. The study used a time series analysis and OLS technique to obtain the results. The factors investigated were, tax rates (tax incentives), the real exchange rate, macroeconomic instability, the political environment, openness, trade liberalization, market size and growth, and export oriented development policy. The study period covered was from 1970-2005.The empirical results suggest that the most dominant determinants of FDI in Malawi among those that were included in the study are market size and growth, export orientation policy, corporate taxes, the real exchange rate, the political environment and macroeconomic stability. These are followed by openness and trade liberalization which did not have a significant impact on FDI during the study period. The results show that macroeconomic stability, the political environment, a stable exchange rate, and export oriented policy have a positive significant impact on FDI flows to Malawi. In addition to this, a broad domestic market base, market potential and tax incentives play a significant role in attracting FDI in Malawi. Malawi can therefore increase FDI inflows in the short term by streamlining its investment regulatory framework, implementing policies that promote macroeconomic economic stability. In the long run, more FDI can be attained by developing a more efficient legal framework and ensuring a favorable political atmosphere. Furthermore Malawi can attract more FDI by broadening its domestic market base. These steps will not only generate sustained growth prospects and hence market potential, but will also provide a conducive environment for FDI in Malawi