Effects of Trade Openness and International Financial Inflows on Africa's Productive Capacity: A Study of the Moderating Role of Governance Institutions

We investigate the effects of trade openness and international financial inflows (including foreign direct investment, remittances and foreign aid inflows) on Africa's productive capacity and how governance institutions are moderating these effects. We adopt the dynamic system GMM modelling framework and the Bun and Carree (2005) bias-corrected least square dummy variable estimator with a panel of 43 African economies. We also use the Driscoll and Kraay (1998) standard error fixed effect estimation, which controls for cross-sectional dependence to provide robustness check. We find that trade openness and the various components of international financial inflows are significant drivers of productive capacity in Africa, and that governance institutions are moderating and enhancing their effects. We also find that renewable energy consumption, human capital development and infrastructure development are promoting Africa's productive capacity. We highlight the policy implications of these findings, which among others, encourage policymakers and leaders in Africa to focus on policies that can enhance cross border trade, attract international financial inflows and entrench high-quality institutions.