Effects of Capital Flows on Industrialization in Sub-Saharan Africa: Does Corruption Matter?

Abstract

This article empirically analyzes the direct and indirect effects of capital flows on industrialization through corruption during the period 2010-2021 in 39 sub-Saharan African countries. The data comes from the World Bank's 2022 development indicators database. The econometric results, after applying the GMM estimator in the Blundell and Bond (1998) system, can be generalized as follows. First, capital flows have ambiguous effects on industrialization in sub-Saharan Africa. Indeed, foreign direct investment promotes industrialization, while official development assistance has the opposite effect. Second, controlling corruption increases industrialization in sub-Saharan Africa. Unexpectedly, the results reveal that controlling corruption reduces the positive effect of foreign direct investment on industrialization and accentuates the negative effect of official development assistance. This indicates that there is a minimum threshold of corruption control beyond which foreign direct investment becomes detrimental to industrialization in sub-Saharan Africa.