Foreign direct investment, human capital, and financial development in emerging markets

Abstract

This study examined the influence of FDI on human capital development in emerging markets. It also explored the role of financial development in FDI-led human capital development in emerging markets. The study used the dynamic generalized methods of moments (GMM) and fully modified ordinary least squares (FMOLS). It also utilized panel data ranging from 2004 to 2019. Models 2 and 3 of FMOLS (fully modified ordinary least squares) indicate a significant enhancing impact of FDI on the development of human capital, while model 1 of FMOLS and all three models of the dynamic GMM (generalized methods of moments) show an insignificant influence of FDI on human capital. Models 1, 2, and 3 under the dynamic GMM and models 1 and 3 under FMOLS demonstrate a significant enhancing influence of the complementarity variable on human capital development. This implies that financial development improved FDI’s chances of contributing to the significant development of human capital. The study indicates that FDI is an important pillar in improving human capital development in emerging markets. Policies aimed at improving FDI inflows and deepening the financial sector should be implemented by emerging markets to significantly develop the human capital base of their economies.