Abstract
This paper analyses the relationship between foreign direct investment (FDI) and human capital development in Sub-Saharan Africa (SSA) using the spatial Durbin model (SDM) on a panel of 39 countries spanning the period from 1996 to 2019. Of particular interest to this study is the handling of endogeneity, heterogeneity and spatial dependence. From non-spatial model the study revealed that FDI had a positive and significant impact on human capital. However, after controlling for endogeneity using two-stage procedure, FDI is found to have a negative and significant effect on human capital. Similarly, two-stage SDM regression that controls for spatial effects revealed a negative although insignificant effect. More importantly, controlling for endogeneity yielded robust results in both spatial and non-spatial regression, but confirmed the robustness of the two-stage SDM over the SDM. Regarding the spillover effects, FDI revealed significant negative indirect and net marginal effects on human capital based on two stage SDM. Particularly, it is found that a one per cent increase in local country FDI is likely to diminish human capital by 0.192% in adjacent countries. This contrasts the marginal effects from the SDM model which depicted insignificant positive direct and negative indirect spillover effects. The findings from this study highlighted the presence of the spatial dependence between SSA countries. While bilateral trade among SSA countries is essential, however, that must be implemented in conjunction with tighter migration laws to help curb negative spillover of FDI on human capital in the adjacent countries. Government spending must be redirected on critical expenditures such as education and health care if the region aims to build a well-developed human capital. Finally, future studies could provide in-depth analysis by looking at sector-specific FDI inflows to measure impact on human capital development, instead of capturing the relationship from a general approach.