Non-linearity of FDI and human capital development in Africa

Abstract

Abstract In this paper, we model the non-linear effect of FDI on disaggregated levels of human capital development in selected African countries. Our sample is based on a panel data consisting of nine African countries from 2000 to 2017. To ensure robustness in our analysis, we employed a GMM instrumental variable estimation technique with Driscoll–Kraay standard errors to control for endogeneity, sectional and temporal dependency. The result indicates that different level of human capital reported mixed findings. The effect of FDI on primary education is characterised by an inverted U-shaped relationship, whereas tertiary education exhibits a U-shaped pattern. Conversely, the relationship between FDI and secondary education is insignificant. The non-linear term of FDI indicates that there is a turning point before/after which the human capital-augmenting hypothesis is supported. Policy implications drawn from this study suggest FDI can be used as a catalyst to augment primary and tertiary education enrolment rates, skills enhancement and human capital development. However, not all levels of FDI will result in positive gains. The optimal effect of FDI depends on the quantity of FDI before/after the turning point.