External financial inflows and domestic investment in the economies of WAEMU:Crowding-out versus crowding-in effects

Charles Fahinde, Alexis Abodohoui, Muhammad Mohiuddin and Zhan Su ()
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Zhan Su: Abomey-Calavi University, Benin

Journal of Developing Areas, 2015, vol. 49, issue 3, 229-248

Abstract: This paper analyzes the effects of capital inflows on domestic investment in the Economic and Monetary Union of West Africa (WAEMU). The WAEMU countries are Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo. Several studies have examined the conditions of attracting foreign capitals and their contributions to economic growth in sub-Saharan economies of WAEMU. However, very few studies have examined the effects of capital on domestic investment in national economies. In this respect, there are three types of foreign capital to be taken into account namely Foreign Direct Investment (FDI), Official development Assistance (ODA) and Migrants Remittances (MR). FDI, ODA and MR are major sources of external capital flows in developing countries. The current empirical study is based on the theoretical model of Agosin and Mayer (2000) to test the hypothesis of crowding-out and crowding-in of domestic investments by different types of foreign capitals considered. The econometric estimates are based on the GMM method of Arellano and Bond (1991) applied to a panel of WAEMU countries over the period 1996-2011. The results of the study show that FDI crowds-out domestic firms in both the short and long term. Similarly, ODA have a lasting crowding-out effects on local investment. As for migrants’ remittances, the econometric results show that they do not have a significant effect on domestic investment in the countries of the union. These findings imply that the host countries of the WAEMU should invest more on developing their absorptive capability to attract technology transfer oriented FDI, channel the ODA to develop vital infrastructure for rapid economic development and create conducive environment for the MR to divert towards productive investments to create more crowding-in effects in lieu of the crowding-out effects. Practically, the results of this study show that multinationals have a lasting crowding-out businesses in the WAEMU region. This is mainly due to the low technological absorption capacity of local firms and the lack of complementarity between local enterprises and multinational companies. Several future research on capital flows will better appreciate the impact of foreign investment on the economies of developing countries especially those in Africa.

Keywords: investment; crowding-out; crowding-in; WAEMU (search for similar items in EconPapers)
JEL-codes: D74 R1 (search for similar items in EconPapers)
Date: 2015
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