Shaping Institutions: Exploring the Effect of Foreign Direct Investment on Institutional Change in Sub‐Saharan Africa

Shaping institutions is a major concern for policymakers in recent years, especially in SSA, which seeks to emerge economically. This paper explores the effect of FDI on institutional change within the region using the FGLS and LSDV as baseline models over a sample of 39 countries from 2000 to 2021. Institutional change is primarily captured by the change in the Economic Freedom Index. We obtained the following results: FDI improves institutional change, its speed, and various dimensions of institutions. Also, the results are robust and consistent over different sensitivities and estimation strategies. We also find that the positive institutional effect of FDI may be dampened by the mediating effect of the natural resource curse and the Dutch Disease on domestic investment. We recommend that economies could boost their institutions by attracting FDI and directing it to the most productive sectors, like the manufacturing sectors, rather than just rent‐seeking FDI.