The Enabling Environment for Official Development Assistance and FDI Inflows: An Empirical Evidence from Djibouti

Abstract

By leveraging the best of its strategic and economic advantage and investing in transportation and port facilities, Djibouti has seen amazing progress over the past ten years. However, there are reservations regarding the inclusivity and stability of this expansion in the future. The current research investigates the enabling environment for official development assistance and FDI inflows in Djibouti from the period 1997 until 2020. To examine the impact of key socioeconomic and governance indicators on ODA and FDI inflows, the study used simple ordinary least squares and quantile regression. The results showed that, in the case of official development assistance, variables like GDP and multilateral debt maximize foreign aid to Djibouti. Contrarily, the country's regulatory environment and government effectiveness do not support international assistance. However, the results of FDI showed that Djibouti is more attractive to FDI inflows when there is a greater level of transparency in the rule of law and spending in the health sector. Additionally, the country's regulatory quality, voice accountability, and low population growth rate all contribute to a decline in FDI inflows. Last but not least, the GDP and domestic credit to the private sector indicate a negligible influence in creating a desirable climate for FDI inflows, which is somewhat accurate given the weak economic position of the nation. According to the conclusions, Djibouti should modify its governance structure and implement suitable structural transformations that preserve and appeal to multinational collaboration rather than concentrating primarily on domestic businesses. Finally, the government must liberalize the market, enabling international businesses to freely operate there, while also offering them the support they require, such as fair taxation and stability.