Foreign Direct Investment, Human Capital and Economic Growth in Africa: A Panel Threshold Regression Approach

Abstract

This paper examines how FDI from China, US, EU and the rest of Asia can transmit to sub-Sahara Africa's growth through human capital development for the period (2003-2012). We utilize the education index developed by the UNDP to proxy for the quality of human capital. Using the PTR model, our results show that the human capital threshold level required to absorb knowledge embodied in all FDI sources is 0.51 years in terms of educational attainment. Nevertheless, only FDI from the EU can enhance sub-Sahara Africa's growth through the development of less-skilled stock of human capital (less than 0.51 years). The impact of the latter turns negative and insignificant as the quality of human capital required to absorb knowledge spillovers increases beyond 0.51 years. For other FDI sources, 0.51 years demonstrates a sign-change threshold due to the regime shift from positive to negative. While our findings reveal that Africa is short of quality human capital stock required to absorb advanced knowledge embodied in FDI from both its traditional and emerging investors, it can be argued that the knowledge spillover effects depend on the technicalities and capital intensity of the economic sectors targeted by FDI sources. Based on the EU's result, it could be possible that the knowledge spillover effects in Africa can be effective in less industrialized sectors.