African Continental Free Trade Area, Industrial Capacity Thresholds, and Innovation Ecosystem in Africa: Evidence From the Bias‐Corrected Method of Moments

ABSTRACT

The limited capacity of many African economies to effectively harness the opportunities presented by the African Continental Free Trade Area (AfCFTA) continues to constrain innovation‐driven productive activities. Although increasing attention has been given to the AfCFTA–innovation nexus, limited empirical evidence exists on the role of industrial capacity in shaping this relationship. This study examines the conditional effect of industrial capacity on the relationship between AfCFTA and the innovation ecosystem across 35 African economies from 2010 to 2022 using the Bias‐Corrected Method of Moments (BCMM) estimator. The findings reveal three main outcomes. First, AfCFTA indicators, measured by (i) the share of intra‐African exports and imports relative to GDP, (ii) the share of intra‐African trade relative to total African trade, and (iii) intra‐African trade integration, exert a significant negative effect on Africa's innovation ecosystem. Second, industrial capacity, proxied by manufacturing and industrial value added, exerts a significant positive conditional effect on the AfCFTA–innovation ecosystem nexus. Specifically, the estimated industrial capacity thresholds necessary to mitigate the negative effect of AfCFTA on innovation range from 10.84% to 13.40% for manufacturing value added. The corresponding thresholds for industrial value added is 39.19%. The policy implications of these findings are discussed in the context of SDG 9.