More FDI Is Not the Same as Better Development, SADC Evidence Suggests

Foreign direct investment (FDI) has long occupied a privileged place in development strategy, particularly in economies seeking capital, technology, productive capacity and access to international markets. However, the relationship between attracting foreign investors and building environmentally and socially sustainable economies is far less automatic than conventional investment policy often assumes.

A new paper, "Human Capital, Foreign Direct Investment and Sustainable Regional Development in SADC Economies," by Darlington Chizema of Sol Plaatje University, published in the journal Sustainability, examines this tension across 13 Southern African Development Community economies. Covering 2003 to 2022, the research separates the factors associated with attracting FDI from those linked to environmental, social and governance performance.

The findings complicate a familiar development narrative. Institutional quality and economic growth are positively associated with FDI over the long term, but higher aggregate FDI is negatively associated with ESG performance in the long-run model. Infrastructure and natural capital, meanwhile, display positive long-run relationships with sustainability outcomes, suggesting that the conditions that bring capital into an economy are not necessarily those that determine what the capital leaves behind.

The real policy divide is investment volume versus investment quality

The research covers Angola, Botswana, the Democratic Republic of Congo, Eswatini, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania and Zambia. The period spans two decades of changing commodity cycles, infrastructure expansion, institutional reform and uneven economic performance across the region.

The author uses two linked econometric specifications. One examines what influences FDI inflows, while the second tests the relationship between FDI and an ESG index incorporating environmental, social and governance indicators. The analysis draws on World Bank, UNCTAD, African Development Bank and Worldwide Governance Indicators data, allowing investment, institutional, infrastructure, human-capital and sustainability conditions to be examined within a common framework.

The descriptive picture already points to sharp differences across SADC economies. Average FDI inflows equal 3.64 percent of GDP, but observations range from negative inflows to more than 56 percent of GDP. The ESG index averages 0.457 on a zero-to-one scale, with substantial variation across countries and years.

Key facts from the research:

• 13 SADC economies were examined over 2003 to 2022.
• Average FDI inflows were 3.64 percent of GDP across the underlying dataset.
• Institutional quality and GDP growth were the statistically significant positive long-run factors associated with FDI in the preferred model.
• FDI had a negative statistically significant long-run association with ESG, while natural capital and infrastructure had positive long-run associations.
• Around 82.5 percent of deviations from the long-run FDI equilibrium were corrected within a year, compared with about 18.7 percent for ESG.

Those differences are consequential for investment policy. Governments can improve conditions that make their economies more attractive to multinational firms and still fail to generate comparable progress in environmental protection, social development or governance performance. Investment promotion and sustainable development therefore require overlapping, but not identical, policy architectures.

Governance attracts capital, while human capital plays a less direct role than expected

Institutional quality emerges as the strongest statistically significant long-run correlate of FDI inflows in the preferred specification. Economic growth is also positively associated with FDI, suggesting that investors respond to credible institutions, regulatory stability and expanding market opportunities when making longer-term location decisions.

Human capital produces a more complicated result. Although education, health, skills and technological capability are widely expected to make economies more attractive to investors, the Human Capital Index is not statistically significant in the long-run FDI model once institutional, structural and macroeconomic variables are considered. Infrastructure, natural capital and inflation are also not significant independent long-run predictors of aggregate FDI in that specification.

The result should not be read as evidence that skills are unimportant. It indicates that human capital does not have an independently identifiable long-run relationship with aggregate FDI within this particular model. Skills may influence investment through interactions with institutions, infrastructure, technological capacity or the sectoral composition of investment, relationships that the model does not directly estimate.

The pattern is especially relevant for resource-rich developing economies. Foreign investors entering extractive or resource-oriented industries may respond differently to human-capital conditions than companies establishing technology-intensive manufacturing or service operations. Aggregate FDI can therefore combine investment types with very different employment, knowledge-transfer and productivity effects.

Foreign investment helps ESG in the short run, then the relationship reverses over time

Changes in FDI are positively associated with ESG performance in the short run, but the long-run relationship is negative and statistically significant. The same capital inflow can therefore coincide with different sustainability patterns depending on the time horizon being examined.

Short-term gains could arise through increased economic activity, employment, technology transfer or other channels associated with incoming investment. Over longer periods, however, the negative relationship suggests that aggregate FDI is not consistently translating into improvements across environmental, social and governance dimensions. The research does not establish why this occurs, and the distinction is important.

One possible explanation discussed in the paper is the concentration of investment in resource-intensive activities that generate economic returns without equivalent environmental or social improvements. The analysis cannot test that proposition directly because FDI is measured in aggregate rather than divided by sector, investor motivation or sustainability characteristics.

Reverse causality also remains possible. Stronger ESG performance could influence the type of investors a country attracts, while FDI itself can affect institutions, skills and economic conditions. The methodology uses lagged variables and an error-correction structure to address dynamic relationships, but the author explicitly cautions that the coefficients represent long-run associations rather than strict causal effects.

SADC needs to judge investment by what it builds, not simply by how much capital enters

Infrastructure and natural capital tell a different story from aggregate FDI. Both are positively and significantly associated with ESG performance over the long term. The paper interprets these relationships as evidence that infrastructure can improve connectivity, service delivery and socio-economic conditions, while natural resources can support sustainability when they are effectively managed and channelled toward wider development objectives.

The finding on natural capital deserves careful treatment. It does not imply that resource extraction is inherently sustainable. The positive coefficient reflects the relationship captured by the model, while the developmental effects of natural-resource wealth depend heavily on management, revenue use, environmental protection and the structure of economic activity.

The difference in adjustment speeds sharpens the policy problem. FDI responds relatively quickly when economic conditions change, while ESG performance moves much more slowly. Environmental quality, public services, institutional credibility and social outcomes accumulate through years of investment and policy implementation rather than responding immediately to changes in capital flows.

For governments, the implication is to broaden investment policy beyond annual FDI targets. Investment agencies could pay greater attention to sectoral composition, domestic supplier links, technology transfer, environmental standards, workforce development and the capacity of projects to support infrastructure and local value creation. Development institutions could similarly distinguish between mobilising foreign capital and financing investment capable of generating durable social and environmental returns.

The research also identifies important limits to what can currently be concluded. Aggregate FDI masks differences between resource-seeking, market-oriented, efficiency-driven and sustainability-focused investment. Composite ESG and structural indices depend on indicator selection and weighting, while the assumption of common long-run coefficients across SADC economies can conceal national differences.

Hence, upcoming research needs to move inside the aggregate numbers. Sector-level FDI, greenfield investment, ownership structures, investor origin and project-level environmental and employment outcomes could reveal which forms of foreign capital generate durable development benefits and which do not.