Capital Inflows and Domestic Investment in Sub-Saharan Africa
| Date | 01 November 2016 |
| DOI | 10.1177/0015732516650820 |
| Published date | 01 November 2016 |
| Subject Matter | Articles |
Capital Inflows and
Domestic Investment
in Sub-Saharan Africa:
Evidence from Pooled
Mean Group (PMG)
Estimation Approach
Samuel Adams1
Daniel Sakyi2
Eric Evans Osei Opoku3
Abstract
The issue of whether capital inflows promote domestic investment has been
of major concern especially in developing countries considering their massive
dependence on these inflows. To this end, we make a case for 25 sub-Saharan
African countries, using foreign direct investment and external debt as prox-
ies for capital inflows, and the pooled mean group estimator over the period
1981–2010. The results reveal that foreign direct investment positively impacts
domestic investment, but external debt has a negative impact on domestic invest-
ment in the long run. This implies that increase in foreign direct investment and/
or reduction in external debt will promote domestic investment in sub-Saharan
Africa. Therefore measures have to be put in place to attract more foreign direct
investment and reduce the inflow of external debt in the region.
JEL: C23, F21, F34, O55, P33
Keywords
Foreign direct investment, external debt, domestic investment, pooled mean
group, cointegration, sub-Saharan Africa
Foreign Trade Review
51(4) 328–343
©2016 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732516650820
http://ftr.sagepub.com
Corresponding author:
Daniel Sakyi, Department of Economics, Kwame Nkrumah University of Science and Technology,
Kumasi, Ghana.
E-mail: dsakyi.cass@knust.edu.gh
1 Business School, Ghana Institute of Management and Public Administration, Ghana.
2 Department of Economics, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana.
3 Department of Economics and Finance, City University of Hong Kong, Hong Kong, China.
Article
Adams et al. 329
Introduction
In many developing countries, domestic resources are often inadequate to fund
investments requisite for growth and development. This can largely be attributed
to the low saving rate and chronic budget deficits particularly in sub-Saharan
African (SSA) countries. The United Nations Conference on Trade and
Development (UNCTAD) report in 2000 corroborated by the United Nations
Economic Commission for Africa’s (UNECA) report in 2006 shows that the
investment rate in SSA has to increase to 22.5 per cent from the low levels of
under 20 per cent to reach a sustainable growth rate conducive to reducing poverty
and enhancing the development of the region. It is therefore not surprising that
many developing countries have in recent years embarked on a number of market
reforms and programmes to attract foreign capital.
Regardless of the recent decline in capital inflows to many developing countries,
Africa remains one of the very few regions experiencing a continued rise in receipts
of foreign capital (UN, 2014). The UNECA (2006) report indicates that foreign
capital inflows to SSA increased from $8 billion in 2000 to $45 billion in 2006,
which is nearly 6 per cent of its gross domestic product (GDP). The World Bank
(2014a) Global Economic Prospects Report indicates that since 2008 capital inflows
to SSA have consistently increased from $46.5 billion in 2008 to $56.5 billion in
2009, $59.5 billion in 2010, $62.9 billion in 2011 and $73.6 billion in 2012. In 2013,
capital inflows to SSA accounted for 5.3 per cent of the region’s GDP (World Bank,
2014b). The World Bank (2014b) report also indicates that due to an estimated
increase in capital inflows and household expenditure in the SSA, the growth in the
region is expected to increase from 4.7 per cent in 2013 to 5.2 per cent in 2014.
Foreign direct investment (FDI) inflows to developing countries reached a new
record high of $759 billion in 2013, which accounts for about 52 per cent of glo-
bal FDI flows (UNCTAD, 2014). FDI inflows to SSA have increased persistently
from an amount of $29 billion in 2010 to $37 billion in 2011, $39 billion in 2012
and $42 billion in 2013 (UNCTAD, 2012, 2014). The story is not different when
we consider external debt inflows to SSA, which has shown a persistent increase
from the year 2000 to 2011 with the only exceptions being 2006 and 2007.
According to the World Bank (2013a), the total external debt stock of SSA which
stood at $213.5 billion in the year 2000 increased to $234.4 billion in 2005. After
a decline to $193.9 billion in 2006, it surged to $218.5 billion in 2007, $225.3
billion in 2008, $248.6 billion in 2009, $271.2 billion in 2010 and $295.6 billion
in 2011. These results clearly indicate that over reliance on external debt is a real
phenomenon in SSA countries.
The World Bank (2012) suggests that the recent increase in capital inflows
(particularly FDI) to SSA is due to the increased global competition for natural
resources, higher commodity prices and a fast rising middle class. Other reports
do indicate that the surge in global capital inflows could be attributed to the reduc-
tion in interest rate, the global price risk and domestic borrowing costs (Luca &
Spataforal, 2012). Since many of the developing countries are short of capital, it
is assumed that the new wave of inflows have the potential to raise domestic
investment significantly (Mody & Murshid, 2005).
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