Do human capital and institutional environment constrain the impact of foreign direct investment inflows on economic growth in Africa?

Abstract

This paper investigates the role of human capital and institutional quality in the nexus of foreign direct investment (FDI) and economic growth in 46 African countries between 2002 and 2018. Based on panel data modelling, the empirical findings suggest that FDI in itself does not promote economic growth in Africa; however, we observe that human capital and institutional quality play a supportive role in enhancing the positive spillover effect of FDI on economic growth in upper-middle-income countries in the region. The findings for low-income and lower-middle-income countries are mostly not significant. Given the initial conditions and absorptive capacity constraints in these countries, the positive spillover effects of FDI might be limited. From a policy perspective, the findings call for special attention by policymakers to improving the quality of their human capital and strengthening their institutions to maximize the benefits of FDI.