International Journal of Social Economics

Endogenous specification of foreign capital inflows, human capital development

and economic growth: A study of pool mean group
Hammed Oluwaseyi Musibau, Agboola Hammed Yusuf, Kafilah Lola Gold,
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Hammed Oluwaseyi Musibau, Agboola Hammed Yusuf, Kafilah Lola Gold, (2019) "Endogenous
specification of foreign capital inflows, human capital development and economic growth: A
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IJSE-04-2018-0168
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Foreign capital
Endogenous specification of foreign inflows
capital inflows, human capital
development and economic growth
A study of pool mean group
Hammed Oluwaseyi Musibau Received 19 April 2018
Revised 1 December 2018
Tasmanian School of Business and Economics, Accepted 24 December 2018
University of Tasmania, Sandy Bay Campus, Hobart, Australia
Agboola Hammed Yusuf
Department of Economics, School of Social Sciences,
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Universiti Sains Malaysia, Nibong Tebal, Malaysia, and

Kafilah Lola Gold
Faculty of Economics and Administration,
University of Malaya, Kuala Lumpur, Malaysia

Abstract
Purpose – The purpose of this paper is to empirically investigate the relationship between foreign capital
inflows, human capital development (HCD) and economic growth in ECOWAS countries.
Design/methodology/approach – In line with the augmented Solow model, the relationship between
foreign capital inflows, human capital development and gross domestic product in the ECOWAS member
countries is investigated using the pool mean group method.
Findings – The authors find overwhelming evidence that foreign capital inflows and human development
have a significant effect on economic growth in ECOWAS member countries. However, foreign direct
investment (FDI), official development assistant, HCD and gross domestic investment are positively related to
economic growth in sub-regions economies. Conversely, migrate official remittance, portfolio investments and
external debts are negatively related to economic growth.
Research limitations/implications – The authors recommend that sound economic policies should be
targeted in encouraging foreign capital accumulation and HCD, especially on FDI, official development
assistance that exerts a positive impact on the economic growth of the sub-region. Therefore, training is
required to prepare the labor force to work with new technologies and promote efficient enterprise for
ECOWAS economies to compete with developed countries and emerging economies.
Social implications – This study argued that the development of human capital is a pathway that may lead
countries away from sustained growth. In the context of any economy which lack well-developed capital and
education markets, many otherwise qualified citizens may be denied the basic skills they need in order to
contribute fully to the nation’s economic development. HCD would encourage foreign investments, resulting
in reduction in poverty in ECOWAS countries.
Originality/value – Several studies have been done on foreign capital inflow and economic growth nexus
such as Orji et al. (2014), Ajide and Raheem (2016), Musibau et al. (2017), etc.; however, none of the research
studies has actually examined the effect of the relationship between foreign capital inflows and HCD on
economic growth in ECOWAS countries. This study is designed to fill the vacuum.
Keywords Foreign capital flows, Human capital development, Economic growth, Pool mean group
Paper type Research paper

1. Introduction
Foreign capital inflow is a tool for achieving economic integration and globalization in
developing economies. In the aspect of domestic resources, financing long-term development
projects in many of the less developed countries depends on external sources for executing International Journal of Social
Economics
© Emerald Publishing Limited
0306-8293
JEL Classification — F21, F43, F35, O15, Q43 DOI 10.1108/IJSE-04-2018-0168
 IJSE their projects. However, the need for more foreign capital inflow to support domestic
resources has been welcomed as an engine of economic growth and development, since it is
considered as the central element of the process of economic growth in most developing
nations. Foreign capital inflow also enhances domestic investment, improves managerial
skills, promotes technology transfer as well as increases employment rates (Alfaro and
Johnson, 2012). The economic effects of foreign capital inflows are highly crucial regarding
moving the controls forward from the depression period into prosperity phase. Additionally,
investment in both public and private sectors in most developing countries in Africa has
been hindered by a shortage of capital for investment purpose (Onyeiwu, 2015).
From Figure 1, the inflow of foreign direct investment (FDI) has been relatively low
from 2000 to 2007 due to political uncertainty and corruption, volatility in exchange rate,
reduction in the value of the currency and balance of payment crisis among the ECOWAS
countries. However, a significant improvement experienced in the flow of FDI in 2015 was
due to a well-developed market and higher participation of foreign investors, which was
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accompanied by enabling environment for the investors. Keskinsoy (2017) reported that
foreign capital flow in the form of FDI to West Africa has fallen by 18 percent, which
amount to $9.9bn. This is because multinational cooperation moved to other sub-regions
due to high levels of economic and political uncertainty. Notably, Nigeria, the largest
economy in the region in 2014, lost most of its investors to South Africa and East Africa
due to infrastructural decay, political uncertainty, and a high level of corruption. Also,
Nigeria that is the largest recipient of FDI among the economic integration (see Figure 2)
faced obstacles from fall in commodity prices, exchange rate fluctuation and
postponement in crucial developmental projects that led to decrease in FDI inflows to
$4.7bn in 2014 and about $3.1bn in the year 2015. Nigeria’s economy in 2016 was the
lowest in nine years due to a fall in global oil price, as foreign investment inflow dipped
from $4.52bn to $5.12bn(National Bureau of Statistics, Nigeria, 2017). In other words,
Nigeria’s FDI fell by 46.86 percent, that is, from $9.64bn in 2015 to $5.12bn in 2016. More
evidently, the decline in investment inflow was due to the fall in “other investment and
portfolio investment (PFI)” category made up of equity, which dropped from $176.44m in
the fourth quarter of 2016 to $101.99m in the first quarter of 2017 (Oladeinde O Premium
Times, May 25, 2017). The sharp decrease in FDI to Nigeria was a big shock to the entire
ECOWAS member countries, since FDI to Nigeria represents more than 70 percent of
inflows to the ECOWAS sub-region.
As illustrated in Figure 2, the various types of foreign capital inflows in ECOWAS
countries from 1980 to 2016 show that Nigeria, Senegal, Guinea, Ghana, Cote D’Ivoire,

3,000
2,500
2,000
FDI (billion $)

1,500
1,000
500
0
Figure 1.
–500
FDI inflows in various
00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

global economic
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

communities ECOWAS COMESA AEC OECD members European Union

(2010–2016)
Source: (UNCTAD, 2018)
 300 Foreign capital
250
FDI
inflows
MREM
200
ODA
150
Billion

OPI
100

50

ia

o
n

so

ire

ria
a

na

e
a

au

er

l
i

ga
al

g
ni

rd

bi

on
ne

er
Fa

ig

To
lvo

be
ha

ss

M
Be

am
Ve

Figure 2.

ne
ig

Le
–50
ui

N
Li
G

Bi
d’

N
a

G
G

Se
o
in

ra
a-
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ab

Sectoral and total

rk

e
ot

er
ne
Th
C
Bu

Si
ui

foreign capital
G

Notes: FDI, foreign direct investment; MREM, migrate remittances; ODA, official development inflows to ECOWAS
(average – billion $)
assistance; OPI, official portfolio investments (1980–2016)
Source: UNCTAD (2018)

Cabo Verde and Benin were the highest recipient of foreign capital. However, the
performances of other ECOWAS members have not been impressive when compared to
the volume of inflow Nigeria received. Nevertheless, capital inflows contribute in filling
the resource gap in countries where domestic savings are inadequate to finance the
required investment. Additionally, capital inflows are necessary for macroeconomic
stability as they affect a wide range of macroeconomic variables such as exchange rates,
interest rates, foreign exchange reserves, domestic monetary conditions as well as savings
and investments.
From the forgoing, there are many reasons this study becomes a necessity. First,
despite West Africa’s enormous investment potential, its integration into the global
economy is low. One sign of this is that the region captures only 5 percent of Africa’s total
FDI. The main hurdles for national, regional and foreign investors are cross-border
constraints, in which small businesses and service providers are especially affected
(World Bank Report, 2017). Second, the ability to attract foreign capital inflow in terms of
FDI and development of human capital is considered a major indicator of attracting
growth and development in most of the African region in which ECOWAS also belong.
Therefore, inadequate resources to finance long-term development projects and high
poverty rate among the ECOWAS countries have made government to enact new
economic policies at the regional, national and international levels emphasizing more
foreign capital inflow as a mechanism to develop human capital to achieve sustainable
growth in the African region.

2. Literature review
The inflow of foreign capital stimulates a strong economy, improves production capacity,
decreases unemployment rates and encourages efficient resource allocation. The growing
trend of capital inflows has been deliberated by several researchers with some mixed
results. Kentor and Boswell (2003) observed that the effects of foreign capital inflow were
positively related to economic growth in the short run, but in the long run, the
relationship between foreign capital and economic growth was found to be negative.
Chowdhury and Mavrotas (2005), Pattillo et al. (2002), Cordella et al. (2005) and
 IJSE Ekanayake and Chatrna (2010) buttressed the negative result of the growth rates of an
economy. Capital inflows also have a positive influence on the growth of an economy, as
examined by Berument and Dincer (2004), Alfaro et al. (2009), Njoupouognigni (2010) and
Karamelikli and Bayar (2015).
There has been numerous empirical and theoretical research works conducted recently
on capital inflows and its impact on macroeconomic variables. Alfaro et al. (2004) empirically
investigated the effects of diverse explanations on the factors responsible for poor capital
inflow from the rich countries to the countries that are poor which they termed as “Lucas
Paradox.” The theoretical descriptions consist of disparities in the basics across nations and
imperfection in the capital market. The study further showed that during 1970–2000, poor
quality of the institution was the principal explanation. This study pointed out the key
role of institutional quality in attaining a higher income level but did not emphasize on the
specific mechanisms. The results specified that foreign investment could be a mechanism or
channel by which institutions can influence development in the long run. Related study of
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Alfaro (2003), inspected the numerous links between FDI, economic growth and financial
markets. The empirical analysis was conducted using cross-country data between 1981 and
1999, and the study demonstrated that FDI alone plays a vague role in contributing to the
growth of an economy. Also, nations with well-developed financial market benefit
meaningfully from FDI.
On the methodological ground, several studies investigated the inflow of capital
variables in separation and discovered different results. De Mello (1999), Rehman and
Ahmad (2016), Frimpong and Oteng-Abayie (2006), Akbaş et al. (2013) and Tülüce and
Doğan (2014) observed that the relationship between FDI and economic growth is positive.
Ekanayake and Chatrna (2010) used GMM and OLS estimation techniques to investigate
foreign aid spanning. The data for the period covered from 1980 to 2007 and the research
focused on middle- and low-income nations. The results showed that a negative
relationship exists between economic growth and foreign aid. However, their study is
contrary to Tan’s (2009) findings that discovered that a positive relationship exists
between economic growth and foreign aid with the use of pooled mean group (PMG)
estimation method for sampling 46 developing nations. Also, Paul and Das (2011), Bayar
(2015)and Karamelikli and Bayar (2015) argued that remittances is the main instrument
for enhancing the growth of an economy as their studies showed a positive relationship
between economic growth and remittances. Furthermore, we present the summaries of
studies on the relationship among foreign capital inflow, human capital development
(HCD) and growth domestic product in Table I.
Considering the studies above, we may conclude that there is inconsistency in findings
among scholars on the effect of the linkage of foreign capital inflows and HCD on
economic growth in ECOWAS countries. Several studies have been done on foreign
capital inflow and economic growth nexus such as Orji et al. (2014); Ajide and Raheem
(2016) and Musibau et al. (2017), among others. However, in all the above research works
carried out, none was able to demonstrate the effect of the relationship between foreign
capital inflows and HCD on economic growth in ECOWAS countries, which is the main
objective of this study.

3. Methodology
3.1 Theoretical framework
The theoretical framework for study followed Mankiw, Romer and Weil’s (1992)
model which is an extension of basic Solow (1956) growth model to explain long-run
economic growth in respect of capital accumulation, labor or population growth, and
increase in productivity, commonly referred to as technological progress. However,
Mankiw et al.’s (1992) model, where the neoclassical Cobb–Douglas production function
 Country/Time Dependent Findings relationship of explanatory
Foreign capital
S. no. Study period variable Model/Method variables with explained variable inflows
1 Sunde South Africa GDP ARDL bounds FDI (+)
(2017) (1990–2014) testing approach Export (+)
2 Jawaid and Pakistan GDP FMOLS and panel FDI (−)
Saleem (1976–2015) causality Remittance (+)
(2017) External Debt (+)
3 Musibau 15 ECOWAS GDP FMOLS and panel FDI (−)
et al. (2017) countries causality Official development assistance (−)
(1981–2016) Infrastructures (−)
Corruption (+)
Political stability (+) ECM (−) and Sig.
4 Söylemez Turkey (1992: GDP Extended constant Foreign capital ¼ (FDI+portfolio
(2017) Q1–2012:Q2) conditional investments) positive (+) Volatility of
correlation GDP
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GARCH model
5 Adams Senegal (1970– GDP Autoregressive FDI (−)
et al. (2017) 2014) distributed lag remittance (+)
(ARDL) External debt (−)
6 Bahri et al. 65 developing GDP Generalized Financial development (+)
(2017) countries method of moment Foreign direct investment (+)
(2009–2015) (GMM) Human capital development (+)
Capital Formation (+)
7 Ebele and Nigeria GDP The OLS FDI (−)
Manyo (1985–2016) estimation and the Openness (+)
(2018) Johansen Export (+)
cointegration test
8 Ullah Pakistan GDP Cointegration Trade openness (−)
(2018) (1980–2012) analysis, error Gross fixed capital formation (+)
correction model Human capital development (+)
(ECM) and
Granger causality
9 Alley 25 African/ GDP Generalized FDI (+)
(2017) 2003–2013 method of moment Population (−)
(GMM)
10 Kalai and 15 selected GDP per Autoregressive Trade openness (+)
Zghidi Middle Eastern capita distributed lag FDI (+)
(2017) and North (ARDL) modeling
African approach and
countries Granger causality
(1999–2012) Test
11 Orji et al. West Africa RGDP Seemingly FDI (+)
(2014) Monetary Zone unrelated Remittance (−)
(WAMZ) regression Official development assistance (+) Table I.
The relationship
economies estimation (SURE) Interest rate (−)
among foreign capital
(1981–2010) Exchange rate (−) inflow, human capital
Investment (+) development and
growth
Source: Authors’ computation domestic product

has been augmented with shift variables, is used in this empirical study. Thus, the
basic production function with constant returns and Hicks-neutral technical progress is
as follows:

Y t ¼ At K at L1a
t ; (1)
 IJSE where At represents technology, k is capital; L the labor and t the time. The Solow growth
model assumes the technological evolution as follows:
T
At ¼ A0 e g ; (2)
where A0 represents the initial knowledge stock. It is further assumed that:
At ¼ f ðFDIt ; REMt ; ODAt ; PIt ; EXTDBTt Þ; (3)
where FDI is foreign domestic investment; REM the remittances; ODA the official
development assistance; PI the portfolio investment; and EXTDBT the external debt. The
rearrangement of Equations (1) and (3) results in the following equation:
Y t ¼ f ðFDIt ; REMt ; ODAt ; PIt ; EXTDBTt ÞK at L1a
t : (4)
The growth rate of output per capita is therefore a function of previous growth of investment
in a given industry and of changes in the country’s capital labor ratio. As postulated by the
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Solow–Swan economic growth theory, capital in terms of foreign capital inflows is expected to
increase output and through the multiplier effect, create more jobs and better living
conditions. Labor represents HCD which is expected to have an impact on economic growth.
The multiplier effects of capital in terms of foreign capital inflows will result in an increase in
employment, health, skill development and labor productivity, and consequently an
enhancement in welfare. The empirical literature that justified interconnectivity between
foreign capital inflows and HCD explained in the study of Lucas (1990) hinted that poor HCD
discouraged inflows of FDI in less developed economies. However, Noorbakhsh et al. (2001)
and Zhang and Markusen (1999) stated that the availability of skilled labor in the host country
induced foreign investors is a direct requirement of multinational companies. Additionally,
FDI promotes the quality of domestic human capital through their hiring of domestic
employees who are trained in the MNC environment. Some of these employees are sometimes
hired later in domestic firms and are thus able to offer their expertise, therefore help domestic
firms advance their managerial and technical skills (Kottaridi and Stengos, 2010). This is also
in support of the view of Buera and Shin (2017).
Conversely, Augmented Solow–Swan model (Mincer, 1958; Becker et al., 1964; Nonneman
and Vanhoudt, 1996; Hoeffler, 2002; McDonald and Roberts, 2002; Nkechi and Okezie, 2013)
introduced a traditional variable to Solow model. In the Solow model, growth in output per
worker depends on initial output per worker, y(0); the initial level of technology, A(0); the rate of
technological progress, g; the savings rate, s; the growth rate of the workforce, n;
the depreciation rate, δ; the share of capital in output, α; and the rate of convergence to the
steady state, λ. Thus, the model predicts that a high saving rate will affect growth in output per
worker positively, whereas high labor force growth (corrected by the rate of technological
progress and the rate of depreciation) will have a negative effect on growth in output per worker.
In line with these theories, the relationship between FDI, migrate remittance (REM),
official development assistance (ODA), PFI, external debt (EXTDBT), HCD, gross domestic
investment (GDI), real exchange rate (REALEXCH), real interest rate (RIR) in the ECOWAS
member countries under consideration is specified in the following equations:
GDP ¼ f ðFDI; REM; ODA; PFI; EXTDBT; HCD; GDI; REALEXCH; RIRÞ; (5)

GDPit ¼ b0 þb1 FDIit þb2 REMit þb3 ODAit þb4 PFIit þb5 EXTDBTit
þb6 HCDit þ Β7 GDIit þ b8 REALEXCHit þb9 RIRit þeit ; (6)

where the dependent variable GDP is defined as gross domestic product (GDP) at
current in each country; the FDI is the net inflows of investment to acquire a lasting
 management interest (10 percent or more of the voting stock); REM, measured by personal Foreign capital
remittances comprising personal transfers and compensation of employees. Personal inflows
transfers consist of all current transfers in cash or kind made or received; ODA, measured
by net ODA received (current $); PFI, measured by PFI, net (BoP, current $) and it covers
transactions in equity securities and debt securities. EXTDBT, measured by external debt
total stocks (DOD, current $), and it covers debt owed to nonresidents repayable in
currency, goods or services. HCD which represents human development investment is
measured by secondary school enrollment (net percentage). GDI represents GDI measured
by gross capital formation (GDP percentage). REALEXCH represents real exchange rate
measured by real effective exchange rate index (2010 ¼ 100). RIR is the real interest rate,
that is, the lending interest rate adjusted for inflation as measured by the GDP deflator
(World Bank Report, 2018). βi (i ¼ 0, 1, 2, 3) is the representative parameter for the
intercept and slope coefficients. ε it is the stochastic term, which captures
the impacts of other unexplainable factors that are not included in the model. It is also
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a white-noise error term, whose mean is 0 with constant variance and covariance and t is
the time series (in years).

3.2 The panel unit root tests

For an appropriate panel model, it is highly imperative to check the order of the series. There
are many tests employed by literature to check the presence of unit root in the time series
data, among them are Levin and Lin (1992, 1993), Hadri (2000), Levin et al. (LLC) (2002) and
Im et al. (1997, 2003). As for this study, we used Levin et al. (2002) and Im et al. (1997, 2003)
due to their statistical power. In LLC, it is established that the main hypothesis of panel unit
root is as follows:

X
k
DY t ¼ aþlt þgY t1 þ bi DY ti þet ; (7)
i¼1

where Y represents each of the GDP, FDI, REM, ODA, PFI, EXTDBT, HCD, GDI,
REALEXCH and RIR. Furthermore, the study also employs the second-generation unit root
technique developed by Pesaran (2007) to test for the existence of unit root as well as the
order of the integration of the variables. One of the advantages of the Pesaran (2007) unit
root technique is to examine the unit root in the presence of cross-section dependence. The
observation on the ith cross-section is Yit and t is time generated in a simple form of dynamic
linear heterogeneous model:
 
Y it ¼ 1 fi ei þfi Y i;ti þeit ; i ¼ 1; 2; 3; . . .; N ; t ¼ 1; 2; 3; . . .; T; (8)

Y represents GDP, FDI, REM, ODA, PFI, EXTDBT, HCD, GDI, REALEXCH and RIR each,
Yio initial value has a density function embedded with a finite means and variance, the
unobserved common effect is ft in a single-factor structure of εit and Yit is individual-specific
error term:
eit ¼ dif t þY it : (9)
The combination of the Equations (4) and (5) presents the stationarity hypothesis fi as thus:
DY it ¼ ai þ bi Y i;t1 þ dif t þvit : (10)
However, the null hypothesis (H0: βi ¼ 0 for all cross-sections) is tested against alternative
hypothesis. The fixed value δ is 0 o δ ⩽1 as N→∞ which is the necessary condition of the
consistency of the panel unit root.
 IJSE 3.3 Pool mean group (panel ARDL)
To determine of the long-run relationship among the variables of the model in Equation (10),
we followed Pesaran et al. (1999) developed PMG estimators that consider the parameters to
vary across cross-sections in short run but restrict homogeneity of the parameters in the
long run. PMG estimators assume the short-run dynamic to vary over cross-sections;
however, in the long run, coefficients are restricted to be same. These estimators also
demonstrate the adjustment between short-run and long-run dynamics unlike the fully
modified ordinary least squares (FMOLS) or dynamic ordinary least squares estimators.
More specifically, the unrestricted specification for the auto regressive distributed lags
(ARDL) equations, for i ¼ 1, 2, 3, …, T, time intervals and i ¼ 1, 2, 3, …, N cross-sections for
the explained variable. Hence, the long-run ARDL equation is as follows:
X
q X
q X
q
DlnGDPnit ¼ a1i þa11 DlnGDPiti þ a12 DlnFDI iti þa13 DlnREMiti
1¼1 1¼0 1¼0
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X
q X
q X
q
þa14 DlnODAiti þa15 DlnEXTDBTiti þa16 DlnHCDiti
1¼0 1¼0 1¼0
X
q
þa17 DlnGDIiti þU 1 it; (11)
1¼0

X
q X
q X
q
DlnFDInit ¼ a2i þa21 DlnFDIiti þa22 DlnGDPiti þa23 DlnREMiti
1¼1 1¼0 1¼0

X
q X
q X
q
þa24 DlnODAiti þ a25 DlnEXTDBTiti þa26 DlnHCDiti
1¼0 1¼0 1¼0
X
q
þa27 DlnGDIiti þU 2 it; (12)
1¼0

X
q X
q X
q
DlnREMnit ¼ a3i þa31 DlnREMiti þa32 DlnFDIiti þa33 DlnGDPiti
1¼1 1¼0 1¼0

X
q X
q X
q
þa34 DlnODAiti þa35 DlnEXTDBTiti þa36 DlnHCDiti
1¼0 1¼0 1¼0
X
q
þa37 DlnGDIiti þU 3 it; (13)
1¼0

X
q X
q
DlnODAnit ¼ a4i þa41 DlnODAiti þa42 DlnFDIiti
1¼1 1¼0

X
q X
q X
q
þa43 DlnREMiti þa44 DlnGDPiti þa45 DlnEXTDBTiti
1¼0 1¼0 1¼0
X
q X
q
þa46 DlnHCDiti þa47 DlnGDIiti þU 4 it; (14)
1¼0 1¼0
 X
q X
q
Foreign capital
DlnEXTDBTnit ¼ a5i þ a51 DlnEXTDBTiti þa52 DlnFDIiti
1¼1 1¼0
inflows
X
q X
q X
q
þa53 DlnREMiti þa54 DlnODAiti þa55 DlnGDPI ti
1¼0 1¼0 1¼0

X
q X
q
þa56 DlnHCDiti þa57 DlnGDIiti þU 5 it; (15)
1¼0 1¼0

X
q X
q
DlnHCDnit ¼ a6i þ a61 DlnHCDiti þa62 DlnFDIiti
1¼1 1¼0
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X
q X
q X
q
þa63 DlnREMiti þa64 DlnODAiti þa65 DlnEXTDBTI ti
1¼0 1¼0 1¼0

X
q X
q
þa66 DlnGDPIti þa77 DlnGDIiti þU 6 it; (16)
1¼0 1¼0

X
q X
q
DlnGDInit ¼ a7i þa71 DlnGDIiti þa72 DlnFDIiti
1¼1 1¼0

X
q X
q X
q
þa73 DlnREMiti þa74 DlnODAiti þa75 DlnEXTDBTiti
1¼0 1¼0 1¼0

X
q X
q
þa76 DlnHCDiti þa77 DlnGDPiti þU 7 it; (17)
1¼0 1¼0

  Xn1 X
m1
0
Dzit ¼ si zi;t1 bi yi;t1 þ dij Dzi;tj þ d ijyi;tj mi þeit ; (18)
j¼1 j¼0

where U1, U2, U3, U4, U5, U6 and U7 are serially uncorrelated. σis are the error corrections
and βis show the long-run parameters. PMG assumes that βis are homogenous across each
cross-section in the long run. The recommended method to employ these estimators is
maximum likelihood method. PMG estimators should select reasonable lag lengths for each
cross-section equation through employing Akaike information criterion (AIC) (Pesaran and
Smith, 1995; Kalai and Zghidi, 2017; Mahmood et al., 2017).

3.4 Data sources

The study utilized data from 15 ECOWAS countries from 1980 to 2017, and autoregressive
distributed lag (ARDL) modeling approach was used to investigate the connection between
components of foreign capital inflows (FDI, migrate remittance, ODA, external debt, HCD,
real exchange rate and RIR) and economic growth using secondary data from the World
Bank’s World Development Indicators (2018).
 IJSE 4. Empirical analysis
4.1 Descriptive analysis
Table II represents the summary statistics of the series to investigate the effects
of the relationship between foreign capital inflows and HCD on economic growth in

Variable Mean SD Min. Max. Observations

YEAR
Overall 1998.5 10.97549 1980 2017 N ¼ 570
Between 0 1998.5 1998.5 n ¼ 15
Within 10.97549 1980 2017 T ¼ 38
GDP
Overall 1.40e + 10 5.57e + 10 1.11e + 08 5.68e + 11 N ¼ 570
Between 3.54e + 10 4.83e + 08 1.41e + 11 n ¼ 15
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Within 4.39e + 10 −1.11e + 11 4.42e + 11 T ¼ 38

FDI
Overall 3.53e + 08 1.04e + 09 −7.39e + 08 8.84e + 09 N ¼ 570
Between 6.70e + 08 8069377 2.63e + 09 n ¼ 15
Within 8.00e + 08 −3.02e + 09 6.56e + 09 T ¼ 38
RMT
Overall 6.41e + 08 2.92e + 09 27072.38 2.20e + 10 N ¼ 570
Between 1.76e + 09 1.97e + 07 6.95e + 09 n ¼ 15
Within 2.38e + 09 −6.31e + 09 1.57e + 10 T ¼ 38
ODA
Overall 5.20e + 08 6.72e + 08 4.36e + 07 1.13e + 10 N ¼ 570
Between 3.33e + 08 1.08e + 08 1.19e + 09 n ¼ 15
Within 5.89e + 08 −5.85e + 08 1.07e + 10 T ¼ 38
PORTINVT
Overall 7.68e + 07 1.27e + 09 −1.50e + 10 6.35e + 09 N ¼ 570
Between 6.52e + 08 −1.19e + 09 2.02e + 09 n ¼ 15
Within 1.10e + 09 −1.37e + 10 4.67e + 09 T ¼ 38
EXTDBT
Overall 3.22e + 09 5.43e + 09 3.94e + 07 3.25e + 10 N ¼ 570
Between 4.68e + 09 3.81e + 08 1.80e + 10 n ¼ 15
Within 3.00e + 09 −1.11e + 10 1.78e + 10 T ¼ 38
HCD
Overall 2.34e + 09 1.00e + 10 −2.34e + 09 1.29e + 11 N ¼ 570
Between 5.15e + 09 −4.02e + 08 2.01e + 10 n ¼ 15
Within 8.68e + 09 −1.58e + 10 1.26e + 11 T ¼ 38
DINVT
Overall 3.62e + 09 6.66e + 09 0 3.99e + 10 N ¼ 570
Between 6.09e + 09 1.37e + 08 2.46e + 10 n ¼ 15
Within 2.84e + 09 −1.95e + 10 1.90e + 10 T ¼ 38
EXRATE
Overall 28.11232 27.83292 4.36167 156.1742 N ¼ 570
Between 13.4993 5.255859 56.79822 n ¼ 15
Within 24.61944 −23.94924 127.4883 T ¼ 38
INTRATE
Overall 27.06704 24.54997 4.721667 89.54167 N ¼ 570
Table II. Between 11.56606 5.374279 46.2773 n ¼ 15
Summary of statistics Within 21.88532 −14.4736 81.32541 T ¼ 38
 ECOWAS countries. The study employed the relationship between FDI, migrate remittance Foreign capital
(REM), ODA, PFI, external debt (EXTDBT), HCD, GDI, real exchange rate (REALEXCH) and inflows
RIR (RIR). The mean for indicators in the sub-region for indexes of foreign capitals, HCD and
control variables is 1.40e + 10, 3.53e + 08, 6.41e + 08, 5.20e + 08, 7.68e + 07, 3.22e + 09,
2.34e + 09, 3.62e + 09, 28.11232 and 27.06704, respectively, for ECOWAS countries.
The relationship between foreign capital inflows, HCD and economic growth has been
acknowledged by both economic theories and research literature in many countries of the
world. However, the result in Table III confirmed the existence of correlation among the
independent variables. Meanwhile, a low correlation enables us to predict the absence of
multicollinearity problem and the independent variables.

4.2 Cross-sectional dependency (CD) test

CD test is used determine the appropriate panel unit root to be used for study, more
especially when the issue of heterogeneity is predicted. First generation unit root test may
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not be sufficient to determine the degree of integration of the variable (Guillaumin, 2009;
Shittu and Abdullah, 2019). Additionally, among the ECOWAS countries, some members
like Nigeria, Ghana, Guinea and Senegal have robust economy than other members which
may lead to interdependence among the economic integration. That is, other ECOWAS
member nations may depend on these countries. Considering this, the study presents the
average correlation coefficients and Pesaran’s (2004) CD test in Table IV.
From Table IV, the probability value is 0.163 and CD test calculated value is 23.77.
This shows that there is no presence of cross-sectional dependence in the model.

4.3 Panel unit root test

The detail results of the panel unit root tests conducted for FDI, migrate remittance, ODA,
external debt, HCD, real exchange rate and RIR and economic growth are presented in Table V.

GDP FDI RMT ODA PORTINT EXTDT HCD DINVT INTRATE

GDP 1.0000
FDI 0.0980 1.0000
REMT 0.0179 0.0105 1.0000
ODA 0.1206 0.1114 0.1888 1.0000
PORTINVT −0.2454 −0.2537 −0.3233 −0.0156 1.0000
EXTDT 0.1448 0.3139 0.1588 0.0909 −0.1143 1.0000
HCD 0.3796 0.2186 0.3529 0.0526 −0.1344 0.0920 1.0000
DINVT 0.3934 0.4986 0.3906 0.1570 −0.2573 0.3354 0.1494 1.0000
IR1i −0.0935 −0.1381 −0.0984 −0.0104 0.0237 −0.1113 −0.1022 −0.1298 1.0000
Notes: The correlation matrix is used to measure the strength and direction of the linear relationship
between the two and more variables. In the practical method, the correlation coefficient can range from −1
to +1, with −1 indicating a perfect negative correlation, while +1 indicating a perfect positive correlation, and Table III.
0 indicating no correlation at all Panel correlation

Group variable: Country

Number of groups: 15
Average no. of observations: 38
Variable CD test p-value Corr. Abs (Corr.) Table IV.
Pesaran’s test of
ols_res 23.77 0.1630 0.551 0.662 cross-sectional
Notes: Under the null hypothesis of cross-section independence CD ~ N(0,1) Stata Code: xtcd ols_res, resid independence (CD)
 IJSE Second-generation test
First generation test Pesaran (2007)
Order of Order of
LLC IPS test integration Level First diff. integration
Variables t*stat. t-stat. O of I Zt-bar Zt-bar O of I

GDP −5.72*** −11.62*** I(1) – −5.93*** (0.000) I(1)

FDI 4.42*** −17.30*** I(1) −6.05*** (0.000) – I(0)
REM −9.82*** −26.36*** I(1) – −6.11*** (0.000) I(1)
ODA −4.30*** −7.57*** I(0) −2.037** (0.003) – I(0)
PFI −3.02** −10.01*** I(1) − 4.17*** (0.000) – I(0)
EXTDBT −8.27*** −45.58*** I(1) – −3.48*** (0.000) I(1)
HCD −6.93*** −16.91*** I(1) – −2.44*** (0.000) I(1)
GDI −9.77*** −13.44*** I(1) – −4.05*** (0.000) I(1)
RER −8.24*** −13.35*** I(1) – −1.71** (0.044) I(1)
RIR −11.24*** −16.13*** I(0) −4.78*** (0.000) – I(0)
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Notes: All the reported values for the LLC, IPS test and Pesaran (2007) are distributed N(0,1) under null
Table V. of unit root. The result of the unit root showed a mixed result, i.e. the variables are I(0) and I(1) variables.
Panel unit root Pesaran and Shin (1995) suggested panel ARDL Model for mixed variables irrespective of their order. In the
( first- and second- light of this, we have the validity to perform long-run panel ARDL (pool mean group). *,**,***Significant at
generation test) the 10, 5 and 1 percent levels, respectively

In Table VI, we estimate the long- and the short-run effect of various indexes for foreign
capital inflows and HCD of economic growth of ECOWAS member countries. The results
of f-statistics and coefficient of the speed of adjustment showed that foreign capital
inflows and HCD are statistically significant in ECOWAS countries. The coefficients of
foreign capital inflows and HCD jointly explained economic growth by 17 percent. An
indication that the ECOWAS economies adjusted to equilibrium in the long run by 17
percent is in line with economic theory of Samuelson (2001), who posited that sustainable
growth could be achieved in less developed countries only through efficient enterprise
which is subject to the availability of capital and human resource. Also, McDonald and
Roberts (2002) and Nkechi and Okezie (2013), in their augmented Solow model studies,
argued on the interconnectivity between capital accumulation and HCD. Furthermore, the
FDI, ODA, HCD, GDI and exchange rate were positively related to economic growth in
ECOWAS economies. These results are empirically supported by Kottaridi and Stengos
(2010) and Buera and Shin (2017). However, migrate official remittance (REM), PFI,
external debt and interest rate are negatively related to economic growth in ECOWAS
countries. The negative coefficient of external debt aligned with the opinions of Reinhart
et al. (2012). Reinhart et al. (2012) hinted at the adverse effects of public debt overhang and
found that countries with large public debt tend to experience persistent stagnation.
On this note, external debt is not significant in ECOWAS countries because a large
amount of debt is used in financing unproductive projects such as payment of government
workers salaries, financing election, and building a national stadium or borrowed and
manipulated for personal benefit through corruption. Similarly, remittances and ODA are
negative and significant. Assessing the impact of remittances is difficult because
receiving remittances is not a random event. Households that receive remittances are
likely to exhibit certain characteristics, such as having family members abroad or specific
needs owing to their composition (perhaps they have more dependent children or elderly
members). Moreover, West Africa migrants do not entrust their economies owing to low
return on investment, currency volatility, economic and political uncertainty which also
discourages PFIs.
 Pooled Mean Group (PMG)
Foreign capital
Long run Short run inflows
Variable Coefficient p-value Coefficient p-value

FDI 1.927*** 0.000 1.509** 0.008

REM −6.078*** 0.000 2.605** 0.001
ODA 2.662** 0.003 −0.044 0.659
PFI −3.486** 0.001 −0.083 0.915
EXTDBT 1.218** 0.051 0.483** 0.009
HCD 4.139*** 0.000 1.506*** 0.000
GDI 0.1638** 0.004 3087* 0.056
RER 0.1098*** 0.000 −3.18e + 07 0.276
RIR −0.4512 0.457 15.07999 0.269
ECT(-1) −0.1718 0.000
White’s test χ2: 78.22 0.1720 Decision: Homo
Breusch–Pagan/Cook–Weisberg χ2: 94.63 0.0794 Decision: Homo
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Ramsey RESET test 0.197 No sign of misspecification

VIF Mean ¼ 1.04 All variables o10 No multicollinearity
Notes: Dependent variable: GDP; model section criteria: Akaike information criterion (AIC). GDP is gross
domestic product at current in each country; the FDI is foreign direct investment; REM, measured by Personal
remittances; ODA, measured by net official development assistance received (current $); PFI, measured by
portfolio investment, net (BoP, current $); EXTDBT, measured by external debt stocks, total (DOD, current $),
HCD represents human development investment which measured by school enrollment; GDI presents gross
domestic investment measured by gross capital formation (GDP percentage), REALEXCH represents real Table VI.
exchange rate measured by real effective exchange rate index (2010 ¼ 100); RIR is the real interest rate is the Results of pooled
lending interest rate, respectively. Figures in square parentheses are the p-values. *,**,***Significant at the 1, mean group (PMG)
5 and 10 percent levels, respectively estimation

5. Conclusion
This study examines the effect of the relationship between the various forms of foreign
capital inflows and HCD on economic growth in ECOWAS countries. Our capital flows
variables include FDI, migrate remittance, official PFI and external debt and human capital
is proxy by school enrollment. We find overwhelming evidence that foreign capital inflows
and human development have a significant effect on economic growth in ECOWAS member
countries. However, FDI, official development assistant, HCD and GDI were positively
related to economic growth in sub-regions economies. Conversely, migrate official
remittance, PFIs and external debts are negatively related to economic growth.
Our results suggest that FDI is an essential vehicle for the transfer of technology,
contributing relatively more to growth than domestic investment. Also, ODA is highly
imperative in augmenting saving and trade gap in ECOWAS countries, and HCD is essential
for sub-region growth because foreign capital can only contribute to economic growth when
a sufficient absorptive capability is available in the host economy which, in turn, reduces the
transactional cost of foreign investors.
We recommend sound economic policies should be targeted in encouraging foreign
capital accumulation and HCD, especially on FDI, ODA that exerts a positive impact on the
economic growth of the sub-region. Therefore, the training is required to prepare the labor
force to work with new technologies and promote efficient enterprise for ECOWAS
economies to compete with developed countries and emerging economies.
Previous macroeconomic studies in Africa on foreign capital flows and economic growth
in recent time did not include HCD in their foreign capital model and very few studies have
recognized external debt as a form foreign capital inflow. However, the novelty of this work
is an improvement on the studies Orji et al. (2014) and Musibau et al. (2017). Based on the
body of literature, no study has combined foreign capital flows and HCD in ECOWAS
 IJSE member countries. We included an endogenous factor as a determinant of economic growth
in the sub-region.
Finally, the results of this paper suggest some directions for further research. The results
suggest that other endogenous factors as institutions and traditional factor (infrastructures)
should be considered in investigating the connection between foreign capital and economic
growth in the region.

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Further reading
Adeniyi, O., Omisakin, D., Egwaikhide, F.O. and Oyinlola, A. (2012), “Foreign direct investment,
economic growth and financial sector development in small open developing economies”,
Economic Analysis & Policy, Vol. 42 No. 1, pp. 105-128.
Alfaro, L. and Hammel, E. (2007), “Capital flows and capital goods”, Journal of International Economics,
Vol. 72 No. 1, pp. 128-150.
Bilgili, F., Tülüce, N.S., Doğan, I. and Bağlıtaş, H.H. (2016), “The causality between FDI and sector-
specific production in Turkey: evidence from threshold cointegration with regime shifts”,
Applied Economics, Vol. 48 No. 5, pp. 345-360.
Chowdhury, A. and Mavrotas, G. (2006), “FDI and growth: what causes what?”, The World Economy,
Vol. 29 No. 1, pp. 9-19.
Dogan, I., Topalli, N. and Tülüce, N.S.H. (2015), “Threshold effects of renewable energy consumption
among the G20 countries: asymptotic and bootstrap test for linearity and non-linearity in a TAR
Approach/G20 (Ülkeleri Arasinda Yenilenebilir Enerji Tüketiminin Threshold Etkileri: TAR
Yaklasiminda Dogrusal ve Dogrusal Olmayan Asimtotik ve Bootstrap Testi)”, Finans Politik &
Ekonomik Yorumlar, Vol. 52 No. 609, p. 73.
Kurtovic, S., Siljkovic, B. and Milanovic, M. (2015), “Long-term impact of foreign direct investment on
reduction of unemployment: panel data analysis of the Western Balkans countries”, Journal of
Applied Economics & Business Research, Vol. 5 No. 2.
Maddala, G.S. and Wu, S. (1999), “A comparative study of unit root rests with panel data and a simple
new test”, Oxford Bulletin of Economics and Statistics, Vol. 61, Special issue, pp. 631-652.
Pegkas, P. (2015), “The impact of FDI on economic growth in Eurozone countries”, The Journal of
Economic Asymmetries, Vol. 12 No. 2, pp. 124-132.
Pourshahabi, F., Mahmoudinia, D. and Soderjani, E.S. (2011), “FDI, human capital, economic freedom
and growth in OECD countries”, Research Journal of Internatıonal Studıes, No. 19, pp. 71-81.
Ridzuan, A.R., Khalid, M.W., Zarin, N.I., Razak, M.I.M., Ridzuan, A.R., Ismail, I. and Norizan, N. (2018),
“The impact of foreign direct investment, domestic investment, trade openness and population
on economic growth: evidence from Asean-5 countries”.
Shahzad, S.J.H., Rehman, M.U., Abbasi, F. and Zakaria, M. (2014), “Relationship between remittance, export,
foreign direct investment and growth: a panel cointegration and causal Analysis in South Asia”.
Sothan, S. (2018), “Foreign aid and economic growth: evidence from Cambodia”, The Journal of
International Trade & Economic Development, Vol. 27 No. 2, pp. 168-183.
 IJSE Staehr, K. (2018), “Capital flows and growth dynamics in central and eastern Europe”, Post-Communist
Economies, Vol. 30 No. 1, pp. 1-18.
Tan, D. and Meyer, K.E. (2010), “Business groups’ outward FDI: a managerial resources perspective”,
Journal of International Management, Vol. 16 No. 2, pp. 154-164.
Ullah, A., Anees, M., Ali, Z. and Khan, M.A. (2018), “Economic freedom and private capital inflows in
selected South Asian economies: a dynamic panel data evidence”, South Asian Journal of
Business and Management Cases, Vol. 7 No. 1, pp. 41-52.

Appendix

(a) 200 400 600 800 0 2,000

400

300
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OECD
200

100
800

600
EU
400

200

1,000

ASEAN 500

0
2,000

ECOWAS

0
5,000

COMESA

0
100 200 300 400 0 500 1,000 0 5,000

(b)

OECD

800
600
EU
400
200
1,000

500 ASEAN

0
2,000
ECOWAS

0
5,000

Figure A1. COMESA

FDI in graphical
presentation in matrix 0
100 200 300 400 200 400 600 800 0 500 1,000 0 2,000
 Foreign capital
8.000e + 09
inflows
Mean FDIcrt1

6.000e + 09

4.000e + 09

2.000e + 09

1980 1990 2000 2010 2020

YEAR

Benin Burkina Faso

Cabo Verde Cote d’Ivoire
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The Gambia Ghana

Guinea Guinea-Bissau
Liberia Mali
Niger Nigeria Figure A2.
Senegal Sierra Leone lgraph for FDI in all
ECOWAS countries
Togo

Corresponding author
Hammed Oluwaseyi Musibau can be contacted at: mizbauhameed2010@gmail.com

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