Foreign Capital Flows and Economic Growth in Some Selected West African Countries

Abstract

This study explores the intricate relationship between foreign capital flows and economic growth in carefully selected West African countries. The analysis considers a range of foreign capital inflow variables, including foreign direct investment (FDI), foreign portfolio investment (FPI), remittances (RMT), official development assistance (ODA), external debt (EXD), real exchange rates (RER), and trade openness (OPN). It evaluates these variables within the context of several economic theories and models, such as the Balance of Payment Constrained Growth Theory, Factor Endowment Theory, Harrod-Domar Model of Growth, Neoclassical Theory of Growth, and Two-Gap Model Theory. The empirical findings highlight the varying degrees of influence exerted by foreign capital inflows on economic growth across the selected countries. FDI emerges as a consistently positive contributor to economic growth, albeit with variations in its magnitude. In contrast, FPI exhibits mixed effects, positively impacting growth in some nations while exhibiting negative or negligible effects in others. Remittances are found to play a pivotal role, with their influence on economic growth varying across countries. ODA and EXD are revealed to have positive associations with economic growth, underscoring the significance of development aid and external financing. Real exchange rates, while influential, display nuanced effects, and trade openness consistently shows a positive and statistically significant impact on economic growth. These findings have significant policy implications, emphasizing the need for tailored strategies that consider each country's unique economic context and characteristics. It is crucial for policymakers to navigate the complexities of foreign capital inflows to maximize their potential benefits while mitigating associated risks. This study provides a comprehensive examination of foreign capital flows and their impact on economic growth, offering nuanced insights into the intricate relationship between these variables. It underscores the importance of flexible and context-specific policy measures to harness the potential of foreign capital inflows for sustainable economic growth and development in an increasingly interconnected global economy.