Foreign financial flows, human capital and economic growth in African developing countries

Abstract

This study investigates the relationship between foreign financial flows (i.e., FDI inflows, ODA, and remittances), human capital, and economic growth in African developing countries. Along with the two-step system GMM estimator, fixed effect panel quantile regression is applied as a robustness check for the sample of 38 African countries over the period 2002–2017. First, FDI inflows emerge with different impacts on economic growth, depending on the level: negative and positive effects at low and high levels, respectively. Interestingly, these effects are moderated by the human capital of hosting countries. Second, ODA and remittances are found as negative factors for economic growth; notably, higher human capital accumulation of receiving countries reduces these negative impacts. Overall, the results imply that foreign financial flows are correlated differently with human capital in influencing economic growth among African countries. Nevertheless, the significant implications are that more attention must be paid to human capital in these countries, and more feasible policies are urgently needed for better absorption of external capital flows.