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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 32, No. 3, pp.337-360
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2019
Received 28 Apr 2018 Revised 11 Oct 2018 Accepted 29 Jul 2019

Impact of FDI on Economic Growth in Developing Countries: Role of Human Capital

Muhammad Ramzan ; Bin Sheng ; Sumbal Fatima ; Zhilun Jiao
Muhammad Ramzan, Institute of International Economics & Collaborative Innovation Center for China Economy, Nankai University, Tianjin, China, Tel: +86-15122731623 1120156011@mail.nankai.edu.cn
Bin Sheng, Institute of International Economics & Collaborative Innovation Center for China Economy, Nankai University, Tianjin, China, Tel: +86-22-23508981 shengbin@nankai.edu.cn
Sumbal Fatima, Institute of Higher Education, Zhou En Lei School of Government, Nankai University, Tianjin, China, Tel: +86-18822278750 Fatima.aiou@hotmail.com
Zhilun Jiao, Corresponding author, School of Economic and Social Development, Nankai University, Tianjin, China, Tel: +86-13702027652 zjiao@nankai.edu.cn

JEL Classification: O10, O47, F14

Abstract

Economic theory proposes that FDI is one of the primary driving forces for stimulating growth (Barro and Sala-i-Martin 1995). Researchers still debate whether the interpretation of the direct effect of FDI on economic growth is inconclusive, whereas the significance of the absorptive capacity of host countries is commonly emphasized (e.g., Borensztein, De Gregorio, and Lee 1998; De Mello Jr. 1999; Alfaro et al. 2004; Makki and Somwaru 2004; Gönel and Aksoy, 2016). Such uncertainty may be the result of ignoring the effect of certain conditioning variables. This study aims to empirically explore whether FDI contributes to economic growth and whether the effect varies with the human capital development level in a panel data set of 70 developing economies from 1980 to 2015. The study employs the General Methods of Moments estimation instrumental variable technique to deal with the endogeneity issue. The empirical investigation shows that human capital threshold exists above which FDI exhibits a positive impact and below where it shows a detrimental effect on economic growth. Findings may help policymakers in selected developing countries to take advantage of the increasing international investment by considering domestic human capital development level.

Keywords:

FDI, Human capital development level, Economic growth, Developing countries, System GMM

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