Foreign Capital Flows and Economic Growth: Evidence from Sub-Saharan Africa

Abstract

This study examines the relationship between foreign capital flows and economic growth in Sub-Saharan Africa using panel data covering 32 countries over the period 2000–2023, yielding 766 country-year observations. The analysis focuses on four key external financial flows: foreign direct investment, official development aid, remittances, and sovereign debt, while controlling for population, trade openness, and human capital. A fixed-effects regression model is employed following diagnostic testing, including the Hausman specification test, which supports the model’s suitability. The empirical findings indicate that foreign direct investment, human capital, population, and sovereign debt exert a statistically significant positive effect on economic growth in Sub-Saharan Africa. These results suggest that capital inflows and demographic expansion can contribute to economic performance when supported by adequate absorptive capacity and productive utilisation mechanisms. Conversely, official development aid, remittances, and trade openness are found to have a statistically significant negative association with economic growth. These outcomes imply that external inflows do not automatically translate into productive economic gains and may depend on institutional quality, financial intermediation, and the structure of domestic economies. The results further highlight the heterogeneous nature of foreign capital flows, indicating that their effectiveness varies depending on how resources are allocated and managed within recipient economies. The study concludes that improving human capital formation and strengthening policy frameworks for managing external resources are essential for enhancing the growth impact of foreign capital inflows in Sub-Saharan Africa.