Growth in Africa: does the source of investment financing matter?
This paper examines empirical evidence for 11 sub-Saharan African countries on the relationship between economic growth and three principal sources of investment funds: foreign aid, foreign direct investment, and domestic saving. In light of the shortcomings of traditional cross-section analyses, the time series approach is used instead. Modern time series methods are rigorously applied, beginning with unit root tests and followed by model specifications that reflect the revealed temporal behaviours of the variables in each of the 11 countries. Domestic saving seems to play a somewhat more important role in generating economic growth than foreign direct investment or foreign aid. However, the mixture of results across the 11 countries implies that, in general, it is not possible to rank one source of investment financing ahead of any other.