Effects of capital inflows on industrialization in low- and middle-income countries in sub-Saharan Africa

Purpose This study seeks to examine the impact of capital inflows on industrialization in low- and middle-income countries in sub-Saharan Africa (SSA), with a particular focus on assessing whether foreign capital strengthens industrialization depending on a country's level of development. Design/methodology/approach The study uses the system generalized method of moments on a balanced panel of 46 SSA countries for the period 1995–2023. Findings The results show that, in low-income countries, remittances and portfolio investments are positively associated with industrialization, while official development assistance and foreign direct investment have a positive and significant effect on industrialization in middle-income countries. These results suggest that the benefits of foreign capital depend on the type of capital associated with the level of development of the recipient country. Research limitations/implications The study contributes new empirical evidence to the limited literature on foreign capital and industrialization in low- and middle-income countries in sub-Saharan Africa. It highlights the need to develop policies that prioritise the attractiveness of foreign capital, while encouraging domestic absorption capacity in order to stimulate structural and sustainable transformation in the region. Originality/value The originality of this work lies in its comparative approach: unlike existing literature, which treats sub-Saharan Africa as a homogeneous bloc, our study rigorously segments countries according to their level of development (low-income versus middle-income). It thus provides new, nuanced empirical data, demonstrating that the effects of capital inflows on industrialization vary fundamentally depending on the host economy’s wealth threshold.