From Capital Inflows to Social Outcomes: How FDI and Innovation Shape Education, Industry, and Climate Action in Sub-Saharan Africa

Abstract

<title>Abstract</title> Foreign direct investment has long been credited as a driver of development in Sub-Saharan Africa, but its impact on social outcomes is still unclear. This study examines the interaction between external capital inflows, domestic innovation capacity, and institutional quality in influencing advancements in education, industrial development, and climate action. The analysis utilises a balanced panel of more than forty Sub-Saharan African nations from 2005 to 2023, drawing on data from the World Bank and UNCTAD. It employs a range of complementary empirical methodologies, including fixed-effects estimation, Seemingly Unrelated Regression, quantile regression, dynamic System GMM, local projections, Mean Group estimators, and a Dynamic Bayesian Network. The findings indicate that foreign direct investment does not have a consistent or enduring direct impact on social development outcomes when considering persistence, heterogeneity, and endogeneity. Instead, ongoing investment in research and development and better governance quality are the main ways that development gains are made. The results of innovation are very uneven, and broad measures of innovation often don't match up with industrialisation that includes everyone and environmental sustainability. The Dynamic Bayesian Network further emphasises significant path dependence and system-wide interactions, identifying innovation capacity and institutional quality as key transmission mechanisms connecting capital inflows to Sustainable Development Goal performance. The results indicate that development strategies focused solely on capital attraction are inadequate without concurrent investments in domestic capacities and governance reform. <bold>JEL Classification: F21, O33, O43, Q56, O55</bold>