Foreign capital inflows: a panacea to slow economic growth and infrastructure decay in Africa?

Abstract

PurposeThe purpose of this study is to examine the effect of foreign capital inflows on economic growth in 15 Economic Community of West African States (ECOWAS) countries over the period 2008–2018. Specifically, this paper investigates whether selected foreign capital inflows, namely, foreign debt, foreign aid and foreign direct investments substitute or complement government spending in ECOWAS.Design/methodology/approachThe study adopts the two-step system generalized method of moments (GMM) method of estimation to address the problem of dynamic endogeneity inherent in the relationship.FindingsThe result shows that foreign capital inflows into ECOWAS region have not transmitted into economic growth in the region. Further, the findings reveal that foreign capital inflows to ECOWAS have substituted for government spending. The results might be as a result of the high level of corruption in ECOWAS. The results also show that when institutional quality is interacted with foreign capital inflows, the result shows a negative and statistically significant effect on economic growth.Originality/valueUnlike previous studies which pooled both developed and developing economies together, the authors investigate this relationship in a regional study, using ECOWAS to create a roughly optimum size. In addition, the authors adopt the GMM-system method of estimation to address the problem of dynamic endogeneity inherent in the relationship, which has largely been ignored in extant studies.