Human capital, governance and foreign direct investments: Evidence from sub Saharan Africa.
Kabaru, Fatima Wanjiru
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Developing economies in Sub Saharan Africa have become increasingly integrated into the global economy in the recent past. As such, this region has experienced a surge in inward Foreign Direct Investments (FD I). It is expected, that this increase in FDI should lead to better economic performance, hence increased economic growth. However, this effect is determined by the absorptive capacities of the host countries such as governance and human capital. This study provides empirical evidence of the impact of foreign direct investments (FDI) on total factor productivity (TFP) growth, while dependent on the level of governance and human capital of the host country. This analysis was conducted using cross country data for 19 countries in Sub Saharan Africa (SSA) for the period 2007- 2017. The empirical analysis was conducted using the System Generalised Method of Moments approach, accompanied by the Fischer's unit root and the Sargan tests to check for stationarity and overidentifying restrictions respectively. The results suggest a positive non-linear effect of FDI on TFP growth (albeit statistically insignificant). However, the paper also finds that this effect is dependent on human capital as well a governance. The effect is positive with respect to human capital and negative with respect to the latter. This hence implies that efforts should made in increasing the human capital in SSA countries. However, the government systems need to be significantly changed in order to realise gains in TFP growth from inward FDI. Further research can be conducted to determine th effect of other absorptive capacities such as trade openness and financial development on the FDI-growth nexus in SSA.