The Impact of the African Continental Free Trade Area on Foreign Direct Investment in Africa: A Difference-in-Differences Analysis

Abstract

Foreign direct investment represents an important source of external capital, technological transfer, managerial expertise, productive capacity, and international market access for developing economies. Regional economic integration can alter the investment environment by expanding market size, reducing trade barriers, improving policy coordination, and facilitating cross-border production networks. This study examines the relationship between the implementation of the African Continental Free Trade Area and foreign direct investment inflows in African economies. The analysis emphasizes market expansion, location advantages, transaction-cost reduction, and improved investment conditions as important determinants of multinational enterprise location decisions. The study employs a comparative panel-data framework covering 27 African countries, comprising 16 ECOWAS treatment countries and 11 Central African control countries, over the period 2010–2025. Annual secondary data are obtained from the World Development Indicators, Worldwide Governance Indicators, and the International Monetary Fund World Economic Outlook Database. Foreign direct investment inflows measured as a percentage of gross domestic product constitute the dependent variable, while the implementation of the African Continental Free Trade Area represents the principal policy intervention. Economic growth, inflation, government debt, and institutional quality are incorporated as additional explanatory factors. The empirical strategy applies a Difference-in-Differences framework to compare changes in foreign direct investment between treatment and control groups before and after the implementation of the continental trade agreement, while country and time effects account for unobserved heterogeneity and common temporal influences. The study is designed to identify whether regional market integration is associated with changes in foreign investment attractiveness and whether macroeconomic and institutional conditions contribute to differences in investment responses across countries. The analysis provides evidence relevant to understanding the investment dimension of African regional integration and highlights the importance of market expansion, institutional quality, macroeconomic stability, and policy predictability in shaping foreign investment outcomes.