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Abstract
This paper reviews the effects of Foreign Direct Investment (FDI) on the accumulation of Human Capital (HC); and analyzes several economic indicators within developing regions in relation to growth and development. It addresses questions surrounding recent FDI surges; technology transfer; and the importance of HC to economic growth. The analysis employs a dynamic panel procedure to analyze the impact of FDI on the accumulation of human capital, using data averaged over five year periods, for 1970-2010, with HC being the primary variable; and several macro-economic explanatory variables. The assumption is that technological advances are influenced by FDI inflows; which lead to dynamic economic changes; which further stimulate HC accumulation. This paper confirms that FDI has a positive impact on human capital variables represented by the average years of primary and secondary schooling, educational attainment of the total population, and the percentage of higher education in the total population over 15 years of age. Note that as FDI inflows translate into higher human capital stocks; this can also have a growth effect on a country's economy and therefore on FDI attractiveness. However, this positive impact was not statistically significant when the explanatory variables were expanded in each case. Furthermore, although technology absorption and education are identified as keys to this growth nexus; counter-intuitively, the evidence suggested that the relationship between tertiary education and FDI was insignificant for developing countries. The paper goes further to identify the importance of harnessing 'parental human capital', for the long-term economic development of developing countries.
Keywords: Foreign direct investment, human capital, technology transfer, economic growth, developing countries.
Introduction
FDI attraction has been an important part of the growth strategy of developing countries. As such, the impact of foreign direct investment (FDI) on the growth of the economy has been the subject of much research; since many assume that greater inflows of FDI will bring greater benefits to the economy of especially developing countries, (DeMello, 1997). However, as a source of capital, the impact of FDI is dependent on several factors, such as: the form that it takes; the type of FDI; the level of Human Capital; the host sector; the scale; the duration; its location; etc. Additionally, research has supported the view that the enabling environment is critical...