Re-assessing the growth impact of FDI and remittances in Africa: evidence from dynamic panel analysis

Abstract

Foreign direct investment (FDI) and remittances (REM) have emerged as crucial external financial flows that shape Africa’s economic development. While FDI facilitates long-term growth through capital formation, technology transfer, and employment creation, remittances provide a stable lifeline that supports household welfare and community-level resilience. Together, these flows hold transformative potential for inclusive and sustainable development across the continent. This study investigates the dynamic effects of FDI and remittances on economic growth in Africa using panel data from 1980 to 2023 and advanced econometric techniques, including Augmented Mean Group (AMG) estimators and panel vector autoregression (PVAR). The analysis explores various economic contexts to assess heterogeneity across different scenarios. The results generated confirm that FDI is a robust and positive driver of GDP growth, primarily through its contributions to capital formation and productivity enhancement. In contrast, remittances exhibit a negative association with growth, especially in financially developed contexts, where they are more likely to fund consumption than investment. Financial development plays a nuanced role, amplifying the growth effects of FDI while diminishing those of remittances. No significant interaction effect between FDI and REM on growth is observed, underscoring the complexity of capital flow dynamics in the region. The analysis also reveals that remittances demonstrate greater stability than FDI during crises, such as the COVID-19 pandemic. Causality tests indicate a unidirectional relationship from FDI to GDP, while remittances exhibit no causal effect on GDP. The study offers a set of innovative policy proposals to enhance the developmental impact of these flows. The study recommends targeted institutional reforms, greater financial innovation, and regionally coordinated investment frameworks that align FDI and remittance capital with productive sectors and long-term growth goals.