The Roles of Human Capital and Physical Infrastructure on FDI Inflow: Empirical Evidence from East Asia and Sub Saharan Africa

This paper analyzes the impacts of physical infrastructure and human capital on FDI inflow in East Asia and sub-Saharan Africa (SSA). Towards this effect a panel data of 1230 observations of 41 countries from 1975 to 2004 have been analyzed using Prais-Winsten heteroskedastic panels corrected standard errors. The empirical results from this study have confirmed that the main key factors for attracting high level of FDI include: efforts to improve the education levels and skills of the people, relatively well-developed infrastructure, stable and predictable policy and macroeconomic environments, higher GDP growth rates over the past decade, favorable trade policies, market size and political stability. However, the evidence shows that the level of human capital and infrastructure are below the threshold level in SSA to play a positive role in attracting FDI and materialize a structural change in the economy. Thus, investment on education and infrastructure should be taken as development priorities in SSA. Additionally, the study confirms that FDI is a complement not a threat to domestic investment/local firms. The study also reveals that 'middle-income' SSA countries attract FDI better than 'low-income' SSA countries, perhaps because of their human capital and relatively better physical infrastructure. This implies that being located in Africa does not per se rule out successes in attracting FDI.