We examine the nexus between foreign capital inflows and industrial output in the ECOWAS region, accounting for the role of institutional quality using an ARDL-based dynamic panel data model that considers non-stationarity and heterogeneity effects. We find that foreign direct investment enhances industrial activities in both the short and long run. However, the impact of external loans on industrial output is only significant in the long run.

When foreign direct investment interacts with institutional quality, the positive effect on industrial output is reinforced. The external loan interaction with institutional quality poses a statistically significant negative impact on the industry in the long run. We conclude that FDI is a more effective driver of industrial growth than external loans in West African countries.