Effect of Foreign Capital Inflow on Economic Growth In Sub-Saharan Africa
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Abstract
Foreign capital inflows have been judged to play a critical role in economic growth providing the necessary capital to fuel economic development. However, the effect of these capital inflows on economic growth in Sub-Saharan Africa (SSA) has been a subject of debate, with varying results across different studies. This study investigates the effect of foreign capital inflows on economic growth across 26 selected Sub-Saharan African (SSA) countries from 1998 to 2022. The study uses Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), and Official Development Assistance (ODA) as proxies for foreign capital inflow, while real Gross Domestic Product (RGDP) is used to measure economic growth. Data was sourced from the World Bank Development Indicators (WDI), and the System Generalized Method of Moments (GMM) was employed for data analysis. The findings reveal that both FDI and FPI have a significant positive effect on economic growth in SSA at the 5% significance level. While ODA also shows a positive effect on economic growth, it is not statistically significant at the 5% level. The study concludes that Foreign Direct Investment and Foreign Portfolio Investment inflows enhance economic growth in SSA. The study recommends emphasizing local content in FDI to stimulate sustained economic growth, enhancing SSA’s capital market to attract more FPI through competitive international coupon rates, and reviewing SSA’s institutional framework for foreign aid utilization to address loopholes that may hinder short-term growth.
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