Financing Domestic Investment in African Countries: Does the Source of Financing Matter?

Abstract

This paper aims to investigate the effects of various sources of financing on domestic investment in African countries. Domestic savings and credit to the private sector prove to be the most robust sources of financing for domestic investment. While foreign direct investment also has a positive effect on domestic investment, the magnitude is relatively smaller. Official development aid, public external debt and migrant remittances have no statistically significant effect on domestic investment. The evidence has a powerful policy implication: in their efforts to boost domestic investment, African countries should primarily look inward. Improving the environment for financial intermediation and domestic savings mobilization appears to be a more promising route for stimulating domestic investment than relying on imported investment capital.