Capital flows and factor markets : chapter 3

Abstract

This chapter examines the intricate relationships between capital flows, particularly Foreign Direct Investment (FDI), Official Development Assistance (ODA), remittances, and domestic labor markets in Africa. It highlights how capital flows can stimulate domestic investment and productivity, leading to job creation, while also emphasizing that labor market conditions influence the stability and type of these inflows. Key findings indicate that FDI has been predominantly concentrated in the natural resources sector, resulting in limited job creation. The chapter underscores the importance of labor costs and regulations as determinants of capital inflows and suggests that African governments should implement policies to enhance the positive effects of capital flows on development and poverty reduction. Recommendations include promoting investments in labor-intensive sectors, improving labor market functioning, and investing in education and skills development. The chapter also presents case studies from Ethiopia and Ghana to illustrate the impact of FDI on domestic investment and job creation.