Which Form of Foreign Capital Inflows Enhance Economic Growth? Empirical Evidence in Sub-Saharan Africa

Abstract

Empirically, results from time series and cross country studies have identified foreign capital inflows to play a pivotal role in the growth process of host countries. The goal of this paper is to examine the impact of three of the four forms of foreign capital inflows (which include foreign aid, foreign direct investment and personal remittances) on economic growth in SSA. This goal was achieved by using a panel data from 1990-2010 and the newly established pooled mean group (PMG) estimator for dynamic heterogeneous panels. The results of the study indicate that all the three forms of foreign capital inflows have positive and significant impacts on economic growth in the long run. However, personal remittances was the only short run driver of growth in SSA. The study recommends the design and implementation of good fiscal, monetary and trade policies to complement the flow of foreign aid to the country for the realization of its full impact on growth. Furthermore, the study recommends SSA countries to build strong and well-functioning domestic institutions to unlock the potential for remittances to strongly contribute to growth. The study contributes to the existing literature by considering three different forms of foreign capital flows. The study believes that different forms of foreign capital inflows have different effects on economic growth and as a result, the need to examine the impact of each of these forms on economic growth.