Foreign Direct Investment, Institutional Quality and Human Capital Development in Selected African Countries

Foreign direct investment (FDI) is generally thought to contribute to Human capital development of the host countries. Despite the significant flows of FDI into African countries, African countries are still generally known to be plagued with low human capital development. One factor that has been pointed out as the cause for this is the quality of institutions in the region. This study was undertaken to examine the relationship among FDI, Institutional Quality and Human capital Development in selected African countries. The study made used of panel data consisting of 36 African countries, while the time-series version of the data was from 2000 to 2022. Human capital was proxied by human capital index, institutional quality was measured using composite index of six governance indicators, as well as five individual governance indicators such as rule of law, political stability, control of corruption, voice and accountability, and regulatory quality. Cross-sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) was used for the analysis, while Dumitrescu & Hurlin Granger non-causality test was used to examine the direction of causality among the variables. The findings revealed that FDI inflows had no statistically significant impact on the human capital development, but a significant effect of institutional quality on human capital development was found. More so, the interaction between FDI and institutional quality had a positive and significant effect on the development of human capital, implying that the impact of FDI on the development of human capital in the host countries is dependent on the quality of institutions. It was recommended that African policy makers should prioritize enhancing their nation's institutional framework in addition to attracting FDI inflows.