The role of FDI augmented with governance and human capital on structural transformation: Experiences from SSA and EAP countries

Abstract

In the last few decades, the majority of least-developed countries have failed to achieve the structural transformation theme. The concern of achieving structural transformation is further aggravated by the lack of technology, low level of literacy, poor institutional qualities, and low development level of the manufacturing sub-sector in these countries. To examine the role of FDI augmented with governance and human capital on structural transformation, the study used panel data for four Sub-Saharan African (SSA) and three East Asian and Pacific (EAP) countries across 31 years. The auto-regressive Distributed Lag with Pooled Mean Group technique was employed for analysis after checking the possible assumptions. The model for the full panels suggests that FDI inflows, especially when supplemented with good governance and better literacy, promote structural transformation. Moreover, across regions, in the short run, the interactive effect of FDI with governance and literacy had a positive effect for EAP and a negative effect for SSA countries. Finally, the government of the least developed countries that endeavors to achieve structural transformation should focus on improving the quality of governance and literacy rate and then engage in attracting massive inflows of FDI, among others.