Human capital, governance, foreign direct investment and their relationship with TFP growth: Evidence from Sub-Saharan Africa

Abstract

Developing countries in Sub-Saharan Africa (SSA) are increasingly integrating into the global economy. As such, this region has experienced a surge in inward foreign direct investment (FDI). Increasing FDI in African countries should lead to productivity growth, resulting from the transfer of capital, technology and skills. However, this effect is contingent on the absorptive capacities in the host countries, such as governance and human capital. This research brings forth empirical evidence on the impact of FDI on total factor productivity (TFP) growth, while accounting for the level of human capital and governance in SSA countries. This analysis was conducted using cross country data for 34 countries in SSA for the period 1996–2019 and estimated using the system generalised methods of moments (GMM) technique. The results indicate a negative linear effect of FDI on TFP growth, albeit statistically insignificant. The study also finds that there is a positive non-linear effect, dependent on the country’s local conditions of governance and human capital. Hence, greater productivity returns from FDI in SSA can be realised through an increase in the level of human capital and better governance.

KEYWORDS:

• Human capital
• governance
• foreign direct investment
• total factor productivity growth
• Sub-Saharan Africa

JEL CLASSIFICATIONs:

• D24
• O55

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Broad money - M2 (% of GDP) - https://data.worldbank.org/indicator/FM.LBL.BMNY.GD.ZS Domestic credit to private sector (% of GDP) - https://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS External debt stocks - https://data.worldbank.org/indicator/DT.DOD.DECT.CD Foreign direct investment, net inflows (% of GDP) - https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS Gross capital formation (% of GDP) -https://data.worldbank.org/indicator/NE.GDI.TOTL.ZS Inflation, consumer prices (annual %) - https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG Merchandise trade (% of GDP) - https://data.worldbank.org/indicator/TG.VAL.TOTL.GD.ZS Population - https://data.worldbank.org/indicator/SP.POP.TOTL Real GDP - https://data.worldbank.org/indicator/NY.GDP.MKTP.KN School enrollment, primary (% gross) - https://data.worldbank.org/indicator/SE.PRM.ENRR Worldwide Governance Indicators (WGI) - https://info.worldbank.org/governance/wgi/.

Notes

1 These are: Rwanda, Ethiopia, Côte d’Ivoire, Ghana, Tanzania, and Benin (African Development Bank 2020).

2 The AfCFTA will bring together all 55 member states of the African Union.

3 Angola, Burundi, Benin, Burkina Faso, Botswana, Côte d'Ivoire, Cameroon, Republic of Congo, Cape Verde, Ethiopia, Ghana, Guinea, Kenya, Lesotho, Madagascar, Mali, Mozambique, Mauritania, Mauritius, Malawi, Namibia, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, São Tomé and Príncipe, Seychelles, Chad, Togo, Tanzania, Uganda, South Africa, Zambia.

4 Money in circulation outside of banks; demand, time, savings, and foreign currency deposits; bank and traveller's cheques; certificates of deposit and commercial paper (The World Bank 2021b).