The Dynamics of Capital Inflows in Africa: Level, Volatility, and Their Impact on Export and Manufacturing Sectors' Performance

This study examines how foreign direct investment (FDI), external debt, and foreign aid, both in levels and fluctuations, affect export performance and manufacturing value added across 52 African countries from 1996 to 2023. Unlike previous research that combines all inflows, this study separates them by type, includes volatility, and applies the IMF’s resource-based classification (oil exporters, other resource-intensive economies, and non-resource-intensive economies). The analysis uses Dynamic Common Correlated Effects (DCCE) estimators with multiple imputation for missing data, System GMM, GARCH-based volatility measures, and checks for classification stability. These methods address issues such as endogeneity, feedback effects, and cross-sectional dependence, while also managing common data challenges in African panel datasets. The results reveal significant differences. FDI consistently improves export performance, but its impact on manufacturing varies by country. It is positive in resource-intensive economies, but weak or even negative in oil-exporting and non-resource-intensive countries. External debt generally restricts both exports and manufacturing in oil-exporting and non-resource economies, although it can support industrial growth in resource-intensive countries. Foreign aid, especially when unstable, often harms sector performance. Volatility plays a key role: at times, debt volatility benefits oil exporters, but aid volatility almost always disrupts sector performance. The study emphasizes the importance of resource endowments, a country’s ability to absorb capital, and sound macroeconomic management. It shows that capital inflows are not always positive or negative, their effects depend on each country’s structure. These findings offer new insights and help guide policy recommendations for using external finance to support sustainable industrialization and stronger exports.