Effect of financial deepening and institutional factors on industrial value added: Evidence from Sub-Saharan Africa

Abstract

This research evaluates the effect of financial deepening and institutional factors on industrial value. Africa, rich in natural resources, stands poised for resource-based industrialization, yet many nations continue to export raw materials with minimal processing. According to World Bank data, Sub-Saharan African countries have seen a decrease in industrial value added over the years. This decline is partly due to insufficient integration between agriculture and manufacturing. The primary factors in converting raw materials into finished products are labor and capital. While Africa is abundant in intellectual capital, it faces challenges with financial capital. Despite the critical role of financial development in enhancing industrial sectors, institutional factors also play a significant role. This study, which involved 38 Sub-Saharan African nations, analyzes the impact of financial development and institutional factors on industrial value added using multiple linear regression. The findings reveal that both financial development and institutional quality positively influence industrial value added, particularly highlighting the importance of bank capital adequacy, ATM availability, regulatory quality, corruption control, and governance. On the other hand, exchange rates, foreign direct investment, trade openness, and inflation all have a negative impact on industrial value added.