article · Journal of Economic Policy Reform
An empirical analysis across 31 African countries between 2010 and 2020 examines how international financial inflows influence economic complexity and whether institutional quality alters these relationships. The inflows evaluated include remittances, foreign direct investment, and foreign aid. The findings demonstrate that all three forms of financial inflows serve as significant drivers of economic complexity across the continent. Furthermore, the quality of institutions plays a significant moderating role by enhancing the positive impact that these capital flows have on economic complexity. Consequently, establishing an enabling institutional environment is highlighted as an essential priority for African policymakers seeking to attract foreign capital, strengthen productive capabilities, and foster sustainable investment alongside long-term economic growth.
Economic complexity reflects a country's ability to manufacture and export diverse, sophisticated goods. Demonstrating that foreign capital expands this productive capacity, especially when supported by robust institutional quality, provides critical guidance for leaders. It confirms that capital attraction strategies must be paired with institutional reforms to translate external finance into durable, high-value economic development.
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We investigated the effects of international financial inflows (remittances, foreign direct investment and foreign aid) on economic complexity in Africa and the moderation role of institutional quality. We used the dynamic system GMM framework for a panel of 31 African countries over the period 2010–2020. We find that these international financial inflows are significant drivers of economic complexity in Africa, and that institutional quality is significantly moderating and enhancing their effects on economic complexity. Among other recommendations, we encourage policymakers in Africa to continually create an enabling environment to attract these financial inflows in order to promote sustainable investment and economic growth.
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DOI: 10.1080/17487870.2023.2220862
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