Foreign capital flow, institutional quality and human capital development in sub-Saharan Africa

Abstract

This study investigates the moderating effect of institutional quality on the relationship between foreign capital flow and human capital development in sub-Saharan Africa. The study uses a sample of 34 countries in sub-Saharan Africa and data for 2009 to 2019. Human capital development is measured using the Human Development Index (HDI). To control for endogeneity, the study uses the system generalized method of moments (GMM) estimator. The results demonstrate a positive relationship between remittances, foreign direct investment (FDI), institutional quality and human capital development. Official development assistance (ODA), on the other hand, has a negative and significant effect on human capital development. The findings further reveal that the effect of remittances and FDI on the human capital development is moderated by the institution’s quality. However, the effect of ODA on the development of human capital is not influenced by institutional quality. Findings from the study provide valuable insights to policymakers. This study highlights the importance of remittances and FDI in stimulating human capital development in sub-Saharan Africa. Additionally, the study reveals the harmful impact of official development on human capital development that necessitates policy interventions. Drawing on these findings, policymakers should undertake policy reforms to improve the quality of institutions and enhance the impact of foreign capital flows on human development. This study offers two contributions. First, the study fills a vacuum in the literature by focusing on the relationship between foreign capital flow, institutional quality, and the development of human capital in sub-Saharan Africa. Second, the SSA is one of the developing nations that has seen a significant brain drain because of widespread migration to industrialized nations. Therefore, it is necessary to investigate how much foreign capital flows through the development of human capital contribute to the socio-economic change of the region.

Keywords:

• foreign capital flow
• human capital development
• Sub-Saharan Africa
• panel data

Disclosure statement

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

Additional information

Funding

The authors have no funding to report.