Effects of Political Instability on Private Investment: Empirical Investigation from African Firms

Abstract

Using data from the World Bank Enterprise Surveys (WBES), our analysis focuses on the effect of perceptions of political instability on private investment at the firm level in Africa. We apply econometric techniques to correct for biases inherent in the data, such as measurement errors, missing observations, and the endogeneity problem. We used time series cross-section analysis employing the two-stage least squares (2SLS) method. Our results show that political instability has a negative and significant impact on business investment, irrespective of location of the firms. However, this effect is insignificant and weak for small firms. Furthermore, we identify a significant impact of administrative constraints, regulatory constraints and infrastructure constraints on investment. These findings highlight the importance of Strengthening political stability in order to stimulate investment, especially in small towns. Putting in place incentives and programmes to encourage employee training can improve business productivity.