External Reserve and the Elasticity of Substitution between Domestic and Foreign Investment in Africa

Richard Umeokwobi, Victor Ocheni and Isah Auwal
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Richard Umeokwobi: Monetary Policy Department, Central Bank of Nigeria, Abuja, Nigeria
Victor Ocheni: Monetary Policy Department, Central Bank of Nigeria, Abuja, Nigeria
Isah Auwal: Monetary Policy Department, Central Bank of Nigeria, Abuja, Nigeria

Financial Economics Letters, 2024, vol. 3, issue 3, 13-24

Abstract: The Paper investigates the elasticity of substitution between foreign direct investment (FDI) and private domestic investment on the external reserves of some selected 14 African countries. To achieve the objective of the best substitutability of investment suitable for Africa, using data on gross fixed capital formation as a proxy for private domestic investment, inflation, external reserves, and foreign direct investment. From the Empirical literature reviewed, studies on the substitutability of investments in external reserves in Africa have not yet been addressed. The Dynamic General Methods of Moments (DGMM) was employed for the analysis since the African countries are more than the scope of the study which ranges from 2010 to 2022. The results show that foreign direct investment is preferred to private domestic investment in Africa. Additionally, the elasticity of substitution from FDI to domestic private investment was found to be stronger and more elastic than the contrary. Therefore, the study recommends that African countries should focus on strengthening fixed assets to create more revenue from additional fixed assets which would impact more on the external reserves of Africa, by attracting foreigners.

Keywords: Africa, External Reserve; Elasticity of Substitution; Investment; DGMM (search for similar items in EconPapers)
Date: 2024
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