Private Capital Flows and Productivity in Sub-Saharan Africa : Does the Capital Allocation Puzzle Matter?

The relationship between foreign capital flows and productivity is still puzzling. We extend the literature on the effect of foreign private capital flows on productivity growth by investigating the effects of the flows across heterogeneous recipient sectors, using a unique hand-collected database of 18 African countries for 2006-2015. We uncover an interesting new finding that the effects of the flows on productivity growth depend on recipient sectors. For example, our new results show that foreign private capital flows to the infrastructure sector have an inverse relationship with productivity growth, which explains the negative relationship between foreign private capital flows and productivity growth documented in the existing literature. Overall, our findings suggest that the capital allocation puzzle is a sectorial capital allocation puzzle