Does Institutional Quality Enhance the Influence of Official Development Assistance (ODA) on Domestic Investment? Evidence from West Africa

This study examines the extent to which institutional quality enhances the influence of Official Development Assistance (ODA) on domestic investment in West Africa, a region that continues to rely heavily on external aid to finance development. Using a balanced panel dataset covering 13 West African countries from 1999 to 2023, this study employs fixed-effects regression models to explore the interaction between ODA and governance indicators, including political stability, government effectiveness, the rule of law, control of corruption, regulatory quality, and voice and accountability. The results indicate that ODA cexerts a positive and statistically significant influence on domestic investment, onfirming its potential role in stimulating capital acquisition. Moreover, institutional quality indicators, such as political stability and the rule of law, emerge as exerting significant influence on investment performance, underscoring the importance of governance in shaping the developmental effectiveness of aid. The findings show that ODA positively influences domestic investment, even under limited institutional conditions; however, its impact is substantially enhanced when institutional quality is high. Strong institutions improve aid management and allocation, enabling recipient countries to more effectively translate aid inflows into productive and sustainable investment outcomes. Thus, improving institutional quality across West Africa is essential for maximizing the long-term benefits of ODA and fostering sustainable domestic investment-led growth.