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External Reserve and the Elasticity of Substitution between Domestic and Foreign Investment in Africa

Author

Listed:
  • Richard Umeokwobi

    (Monetary Policy Department, Central Bank of Nigeria, Abuja, Nigeria)

  • Victor Ocheni

    (Monetary Policy Department, Central Bank of Nigeria, Abuja, Nigeria)

  • Isah Auwal

    (Monetary Policy Department, Central Bank of Nigeria, Abuja, Nigeria)

Abstract

The Paper investigates the elasticity of substitution between foreign direct investment (FDI) and private domestic investment on the external reserves of some selected 14 African countries. To achieve the objective of the best substitutability of investment suitable for Africa, using data on gross fixed capital formation as a proxy for private domestic investment, inflation, external reserves, and foreign direct investment. From the Empirical literature reviewed, studies on the substitutability of investments in external reserves in Africa have not yet been addressed. The Dynamic General Methods of Moments (DGMM) was employed for the analysis since the African countries are more than the scope of the study which ranges from 2010 to 2022. The results show that foreign direct investment is preferred to private domestic investment in Africa. Additionally, the elasticity of substitution from FDI to domestic private investment was found to be stronger and more elastic than the contrary. Therefore, the study recommends that African countries should focus on strengthening fixed assets to create more revenue from additional fixed assets which would impact more on the external reserves of Africa, by attracting foreigners.

Suggested Citation

  • Richard Umeokwobi & Victor Ocheni & Isah Auwal, 2024. "External Reserve and the Elasticity of Substitution between Domestic and Foreign Investment in Africa," Financial Economics Letters, Anser Press, vol. 3(3), pages 13-24, September.
    • Handle: RePEc:bba:j00007:v:3:y:2024:i:3:p:13-24:d:364
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    References listed on IDEAS

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    5. Samuel Antwi & Xicang Zhao, 2013. "Impact of Foreign Direct Investment and Economic Growth in Ghana: A Cointegration Analysis," International Journal of Business and Social Research, LAR Center Press, vol. 3(1), pages 64-74, January.
    6. Stephen R. Bond, 2002. "Dynamic panel data models: a guide to micro data methods and practice," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 1(2), pages 141-162, August.
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