Private capital flows and productivity in Sub-Saharan Africa: does the capital allocation puzzle matter?

Abstract

ABSTRACT The puzzling relationship between foreign private capital flows and productivity remains unresolved. We attempt to resolve the puzzle by extending the literature to investigate the effects of the flows across heterogeneous recipient sectors, using a unique hand-collected database of 18 African countries for 2006–2015. We uncover a new interesting finding that the effects of the flows on productivity growth depend on recipient sectors. The results suggest that the negative relationship between foreign private capital flows and economic growth documented in the existing literature, particularly in developing countries, is related to the fact that most of the flows went into sectors, such as extractives and infrastructure, which have less potential for productivity growth. Overall, our findings suggest that the capital allocation puzzle is a sectoral capital allocation puzzle.