Foreign capital inflows and trade openness nexus: the case of selected Sub-Saharan Africa countries.

Abstract

The focus of the study was to investigate the relationship between foreign capital inflows and trade openness in sub-Saharan Africa (SSA) countries. The research involved 31 countries of the SSA region. The study used unbalanced panel data from 1985 to 2018 from the International Monetary Fund, balance of payments yearbook and world development indicators. The first objective was to examine the relationship between foreign capital inflows and trade openness using a panel smooth transition regression model. The findings revealed the existence of a positive and significant bi-directional causality between foreign capital inflows and trade openness. This implies that the two flows are connected and therefore can exert a positive multiplier effect on each other. The second objective was to examine the socioeconomic determinants of foreign capital inflows. The study applied the random effect model (RE) and the dynamic model of generalised method of moment (SYSGMM). The findings showed that, real interest rate, real exchange rate, inflation, GDP growth rate and food security significantly impact on foreign capital inflows. The third objective was to investigate the impact of foreign capital inflows and trade openness on output performance. The researcher adopted the RE and the SYSGMM. The findings showed that FDI and FPI are statistically significant whereas, trade openness is not statistically significant to impact output performance. The study recommends that more steps should be taken to deepen interregional and regional economic integration in Africa, including the implementation of free trade agreements so as to promote trade and foreign capital inflows. Again, the governments of SSA countries that wish to attract more foreign capital inflows should improve on health facilities so as to increase life expectancy; ensure that there is food security; and improve the education system so as to increase the number of literates in the region. Lastly, an ideal bank for regional capital flow should be established subsequent to other banks, such as agricultural banks and banks of industries. This bank should be saddled with the responsibility of managing these investible funds and capital flow and channelling them to the appropriate sector for output performance monitoring.