Do Capital Inflows and Financial Development, Influence Economic Growth in West Africa? Further Evidence from Transmission Mechanisms

  • Anthony Orji University of Nigeria, Nigeria
  • Jonathan E. Ogbuabor University of Nigeria, Nigeria
  • Chiamaka F. Okolomike University of Nigeria, Nigeria
  • Onyinye I. Anthony-Orji University of Nigeria, Nigeria
Keywords: Foreign Capital Inflows, Financial Development, Investment, Economic Growth, ECOWAS


This study investigates the channels through which shocks from foreign capital inflows and financial development are transmitted to economic growth in the ECOWAS region using quarterly data for the period between 2000 and 2017. The work adopted the panel vector autoregressive (pVAR) model in a generalized method of moments (GMM) framework to actualize its objective. The empirical results show that foreign direct investment (FDI), net domestic credit (CRE), and economic growth (ECG) all have significant relationships with each other, while gross capital formation (GCF), labour force (LF), and foreign aid (AID) have significant relationships with FDI, CRE and ECG. Furthermore, FDI and CRE have negative relationship with economic growth in the short run but have positive impulse response functions with economic growth in the long run. FDI and CRE exhibit positive relationship between themselves in the short run and negative relationship in the long run. Thus, the study recommends concerned policy makers to pursue financial deepening and enact credible policies that strengthen the financial system. In addition, a conducive socio-economic environment should be actively maintained so as to attract the required foreign capital inflows. Finally, more efforts should be made towards the establishment of a single monetary union, as it is likely to further strengthen the region and improve the trade among the member-countries. This should lead to further growth within the region.


Abrigo, M. R. M. and Love, I. (2016). Estimation of Panel Vector Autoregression in Stata. The Stata Journal, 16(3):778–804.

Adeniyi, O., Omisakin, O., Egwaikhide, F. O., and Oyinlola, A. (2012). Foreign Direct Investment, Economic Growth and Financial Sector Development in Small Open Developing Economies. Economic Analysis and Policy, 42(1):105–127.

Adofu, I. (2010). Accelerating Economic Growth in Nigeria, The Role of Foregn Direct Investment. Current Research Journal of Economic Theory, 2(1):11–15.

Agbelenko, F. A. and Kibet, K. S. (2015). Financial Development and Economic Growth in West African Economic and Monetary Union (WAEMU). African Journal of Business Management, 9(17):624–632.

Ajide, K. and Eregha, P. (2014). Economic Freedom and Foreign Direct Investment in ECOWAS Countries: A Panel Data Analysis. Applied Econometrics and International Development, 14(2):163–174.

Anderson, T. W. and Hsiao, C. (1982). Formulation and Estimation of Dynamic Models Using Panel Data. Journal of Econometrics, 18(1):47–82.

Anthony-Orji, O. I., Orji, A., Ogbuabor, J. E., and Nwosu, E. O. (2017). An Empirical Re-examination: Non-oil Export, Capital Formation and Economic Growth Nexus in Nigeria. Journal of Infrastructure Development, 9(1):36–48.

Anthony-Orji, O. I., Orji, A., Ogbuabor, J. E., and Nwosu, E. O. (2018a). Disaggregated Foreign Capital Inflows and Economic Growth in a Developing Economy: Empirical Evidence from Nigeria. Journal of Empirical Studies, 5(1):1–11.

Anthony-Orji, O. I., Orji, A., Ogbuabor, J. E., and Nwosu, E. O. (2018b). Foreign Capital Inflows and Unemployment in Nigeria: A New Evidence from ARDL-bounds Testing Approach. International Journal of Business, Economics and Management, 5(6):176–188.

Anthony-Orji, O. I., Orji, A., Ogbuabor, J. E., and Uka, L. C. (2021). Money Matters a Lot: Empirical Analysis of Financial Development, Financial Inclusion and Economic Growth in Nigeria. International Journal of Economic Policy in Emerging Economies.

Arellano, M. and Bover, O. (1995). Another Look at the Instrumental Variable Estimation of Error-Components Models. Journal of Econometrics, 68(1):29–51.

Azam, M. (2013). Foreign Direct Investment, Financial Deepening and Economic Growth in Azerbaijan and Kazakhstan: A Comparative Empirical Study. The Empirical Economics Letters, 12(6):611–618.

Banbura, M., Giannone, D., and Reichlin, L. (2010). Large Bayesian Vector Auto Regressions. Journal of Applied Econometrics, 25(1):71–92.

Calderon, C. and Liu, L. (2003). The Direction of Causality Between Financial Development and Economic Growth. Journal of Development Economics, 72(1):321–334.

Canova, F. and Ciccarelli, M. (2013). Panel Vector Autoregressive Models: A Survey. Working Paper 1507, European Central Bank.

Chiwira, O., Bakwena, M., Mupimpila, C., and Tlhalefang, J. B. (2016). Integration, Inclusion, Development in the Financial Sector and Economic Growth Nexus in SADC: Empirical Review. Journal of Economics, Management and Trade, 11(4):1–15.

Egbuna, N., Onwioduokit, E. A., Mansaray, K., Umo, M. D., and Adenekan, A. (2013). Capital Account Liberalization in the WAMZ: Gap Analysis. Number 6 in 6. West African Monetary Institute. Occasional Paper Series, Accra Ghana.

Esso, L. J. (2010). Re-examining the Finance-Growth Nexus: Structural Break, Threshold Cointegration and Causality Evidence from the ECOWAS. Journal of Economic Development, 35(3):57–79.

Eze, C. G., Abrokwa, K. K., and Okolo, C. V. (2016). Financial Deepening and Economic Growth Dynamics: Empirical Evidence from the West African Monetary Zone. International Journal of Economics and Management Engineering, 10(2):664–674.

Fry, M. J. (1995). Money, Interest, and Banking in Economic Development. Johns Hopkins University Press, Baltimore.

Hamilton, J. D. (1994). Time Series Analysis. Princeton University Press, Princeton, New Jersey.

Hansen, L. P. (1982). Large Sample Properties of Generalized Method of Moments Estimators. Econometrica, 50(4):1029–1054.

Holtz-Eakin, D., Newey, W., and Rosen, H. S. (1988). Estimating Vector Autoregressions with Panel Data. Econometrica, 56(6):1371–1395.

Iheonu, C. O., Ihedimma, G. I., and Omenihu, M. C. (2017). A Pooled Mean Group Estimation of Capital Inflow and Growth in Sub Saharan Africa. Romanian Economic Journal, 20(65):105–121.

IMF (2017). International Monetary Fund Statistics, 2017.

Isaac, N., Orji, A., Anthony-Orji, O., and Nwankwo, M. (2021). Political Regimes and Private Investment Nexus in Nigeria: An Empirical Verification. The International Journal of Interdisciplinary Global Studies, 16(2):75–88.

Jallohi, M. (2011). Financial Deregulation and Economic Growth in ECOWAS Member States. Research Paper Series 002/11, Economic Policy Analysis Unit (EPAU), ECOWAS Commission.

Kapur, B. K. (1976). Alternative Stabilization Policies for Less-developed Economies. Journal of Political Economy, 84(4, Part 1):777–796.

Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. Macmillan, London.

Koop, G. and Korobilis, D. (2016). Model Uncertainty in Panel Vector Autoregressive Models. European Economic Review, 81:115–131.

Krugman, P. R., Dominquez, K. M., and Rogoff, K. (1998). It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap. Brookings Papers on Economic Activity, 29(2):137–206.

Litterman, R. B. (1986). Forecasting with Bayesian Vector Autoregressions - Five Years of Experience. Journal of Business & Economic Statistics, 4(1):25–38.

Love, I. and Zicchino, L. (2006). Financial Development and Dynamic Investment Behavior: Evidence from Panel VAR. The Quarterly Review of Economics and Finance, 46(2):190–210.

Lutkepohl, H. (2005). New Introduction to Multiple Time Series Analysis. Springer Science & Business Media.

McKinnon, R. I. (1973). Money and Capital in Economic Development. Brookings Institution Press.

Musibau, H. O., Mahmood, S., and Hammed, A. Y. (2017). The Impact of Foreign Capital Inflows, Infrastructure and Role of Institutions on Economic Growth: An Error Correction Model. Journal of Economic Studies, 3(4):35–49.

Ndebbio, J. E. U. (2004). Financial Deepening, Economic Growth and Development: Evidence from Selected Sub-Saharan African Countries. Research Paper 142, African Economic Research Consortium.

Ng, S. and Perron, P. (2001). Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power. Econometrica, 69(6):1519–1554.

Nkoro, E. and Uko, A. K. (2012). Foreign Capital Inflows and Economic Growth in Nigeria: An Empirical Approach. Asian Journal of Empirical Research, 2(5):149–161.

Nwanna, I. O. and Chinwudu, C. F. (2016). The Effect of Financial Deepening on Economic Growth in Nigeria (1985-2014). IOSR Journal of Economics and Finance, 7(4):11–28.

Nzotta, S. M. and Okereke, E. J. (2009). Financial Deepening and Economic Development of Nigeria: An Empirical Investigation. African Journal of Accounting, Economics, Finance and Banking Research, 5(5):52–66.

Odhiambo, N. M. (2011). Financial Deepening, Capital Inflows and Economic Growth Nexus in Tanzania: A Multivariate Model. Journal of Social Sciences, 28(1):65–71.

Olayiwola, W., Okodua, H., and Osabuohien, E. S. (2014). Finance For Growth and Policy Options for Emerging and Developing Economies: The Case of Nigeria. Asian Development Policy Review, 2(2):20–38.

Orji, A. (2012). Bank Savings and Bank Credits in Nigeria: Determinants and Impact on Economic Growth. International Journal of Economics and Financial Issues, 2(3):357–372.

Orji, A., Aza, G. C., Anthony-Orji, O. I., and Isaac, N. (2021a). Foreign Direct Investment - Firm Productivity Nexus in West Africa: New Empirical Insights from Firm Level Data. Journal of Public Affairs, page e2661.

Orji, A. and Mba, P. N. (2011). Foreign Private Investment, Capital Formation and Economic Growth in Nigeria: A Two Stage Least Square Approach. Journal of Economics and Sustainable Development, 2(2):14–27.

Orji, A., Nwagu, G. U., Ogbuabor, J. E., and Anthony-Orji, O. I. (2021b). Foreign Direct Investment and Growth Nexus: Further Evidence from Africa’s Largest Economy. Journal of Infrastructure Development, 13(1):65–78.

Orji, A., Ogbuabor, J. E., and Anthony-Orji, O. I. (2016). Financial Openness and Growth in Nigeria: Empirical Evidence from Defacto and De Jure Approach. International Journal of Economic Research, 13(4):1595–1627

Orji, A., Ogbuabor, J. E., Anthony-Orji, O. I., and Mbonu, C. O. (2019a). Analysis of Capital Formation and Foreign Aid Nexus in Nigeria. International Journal of Emerging Markets, 14(2):266–280.

Orji, A., Ogbuabor, J. E., Nwosu, E., Anthony-Orji, O. I., and Isaac, S. T. (2019b). Financial Development, Human Capital and Economic Growth in Nigeria: An Empirical Analysis. Journal of Academic Research in Economics, 11(3):507–531.

Orji, A., Uche, A. S., and Ilori, E. A. (2014). Foreign Capital Inflows and Growth: An Empirical Analysis of WAMZ Experience. International Journal of Economics and Financial Issues, 4(4):971–983.

Sims, C. A. (1980). Macroeconomics and Reality. Econometrica, 48(1):1–48.

How to Cite
Orji, A., Ogbuabor, J., Okolomike, C., & Anthony-Orji, O. (2022). Do Capital Inflows and Financial Development, Influence Economic Growth in West Africa? Further Evidence from Transmission Mechanisms. Econometric Research in Finance, 7(1), 71-94.
Bookmark and Share