Do Sub-Saharan African Cities With Lower Labour Cost Attract Greater FDI Inflow?

Developing countries are expected to have a comparative advantage in labour intensive manufacturing activities, and thus attract significantly higher FDI inflows. This chapter investigates the extent to which labour costs affect FDI inflow to Sub-Saharan African cities. The use of city level rather than national FDI inflow reduces problems of omitted variable bias and allows for better econometric identification. Our analysis reveals that cities with relatively lower wage rates do not attract greater FDI inflows after controlling for productivity differences. Capital cities have significantly higher FDI inflows after controlling for differences in wage rates and productivity. The results suggest that agglomeration forces associated with city size in Sub-Saharan Africa are more important determinants of FDI inflows than differences in wage rates.