The enhancing effect of human capital on the FDI and Economic Growth nexus

Abstract

The importance of Human Capital accumulation in order to achieve greater economic growth is not neglected in economic theory. In this paper we look at the importance of human capital for enhancing the effect of another factor, inward foreign direct investment (FDI), that may affect growth. Governments in all continents now compete actively for FDI but not all countries reap the full benefits from it. Our study demonstrates that FDI has a greater impact on GDP growth for OECD countries that meet minimum thresholds of absorptive capacity measured by human capital proxy and private R&D. An active policy towards FDI implies therefore to support human capital development, learning and investment by local firms, as a way not only to attract high quality FDI but also to enhance the potential benefits arising from foreign presence.