Institutional Quality And Foreign Direct Investment Inflows In ECOWAS

Abstract

There is no doubt that several studies have examined the linkage between institutional quality and foreign direct investment, but the fact remains that institutional quality as a measure of governance effectiveness cannot on its own provide remedy towards facilitating capital inflow. It is on this note that this study examines the impact of institutional quality on foreign direct investment (FDI) in the Economic Community of West African States (ECOWAS) Sub-region, with an underlying focus on the mediating role of economic openness in the link between institutional quality and foreign direct investment (FDI) inflows. Using annual panel data covering 12 ECOWAS countries from 2010–2024, the study employed Structural Equation Modelling (SEM). Results reveal that rule of law exert a negative direct effect on FDI inflows, reflecting persistent instability, weak policy implementation, and investor concerns about political risk across the sub-region. However, trade openness provides a modest but significant mediation effect, suggesting that market access can partly offset the deterrent impact of governance challenges. The study concludes that legal and institutional reforms alone are insufficient to attract investment. ECOWAS governments should complement reforms with robust trade and commercialization policies to foster a more enabling environment for sustainable FDI.