Moderating effect of institutional quality on the influence of debt on investment in sub-Saharan Africa

Obaike John Ojeka (), Tajudeen Egbetunde, Gideon Oseibibi Okoduwa, Aisha Omobolanle Ojeyode, Mumuni Jimoh and Gideon Oladele Ogunbowale
Additional contact information
Obaike John Ojeka: Centre for the Study of the Economies of Africa
Tajudeen Egbetunde: Federal University of Technology
Gideon Oseibibi Okoduwa: Ambrose Alli University
Aisha Omobolanle Ojeyode: Centre for the Study of the Economies of Africa
Mumuni Jimoh: Federal University of Technology
Gideon Oladele Ogunbowale: Tai Solarin University of Education

Future Business Journal, 2024, vol. 10, issue 1, 1-17

Abstract: Abstract The relationship between external debt and economic growth has been extensively studied by researchers and policymakers. However, the link between external debt and domestic investment remains an underexplored area of research. Therefore, this paper investigates the nexus between external debt and domestic investment, using institutional quality as a moderator. The sample consists of 47 sub-Saharan African countries with data spanning from 1996 to 2021. The empirical findings from conventional and robust estimators indicate that external debt negatively and significantly hampers domestic investment, while institutional quality plays a significant moderating role in this relationship. Additionally, the benefits of debt can only be realized by the SSA region when the average quality of institutions is above − 1.174 on the scale of − 2.5 to 2.5. The in-depth analysis offers insights that high-quality institutions (above a certain threshold) can help countries leverage debt for positive outcomes by promoting efficient resource allocation and attracting further investment. Thus, policymakers are advised to uphold debt management strategies and institutional reforms, such as reducing corruption, improving property rights, and strengthening the rule of law, to ensure transparency in debt use and maintain a sustainable debt burden. This will create a more attractive environment for both domestic and foreign investment. The results remain robust to alternative methodologies.

Keywords: External debt; Institutional quality; Private investment; Africa; Dynamic threshold; Two-step GMM (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1186/s43093-024-00362-0 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:futbus:v:10:y:2024:i:1:d:10.1186_s43093-024-00362-0

Ordering information: This journal article can be ordered from
https://fbj.springeropen.com/

DOI: 10.1186/s43093-024-00362-0

Access Statistics for this article

Future Business Journal is currently edited by Soad Kamel Rizk and Hayam Wahba

More articles in Future Business Journal from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().