The Effect of Official Development Assistance on Domestic Investment and Foreign Direct Investment in Sub-Saharan African Countries

Abstract

The aim of this article is to examine the effect of official development assistance (ODA) on domestic investment and foreign direct investment (FDI) in 30 sub-Saharan African countries over the period 2006 to 2019. To achieve this objective, two linear models are specified on the basis of existing literature. The first model examines the effect of ODA on domestic investment, while the second model examines the effect of ODA on FDI. The estimation results, obtained using the Realisable Generalized Least Squares (RGLS) method of Parks (1967), show that ODA positively affects domestic investment, on the one hand, and FDI in sub-Saharan African countries, on the other. Estimation of these models using the method of Driscoll & Kraay (1998) confirms the robustness of our initial results. On the basis of these robust results, we recommend that the governments of sub-Saharan African countries and international institutions ensure that ODA is used in a way that complements national efforts and does not replace them. This complementarity requires strategic management of aid, with an emphasis on productive investment while at the same time aiming to attract FDI.

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