Foreign direct investment, human capital and export diversification in Africa: A panel smooth transition regression (PSTR) model analysis

This paper investigates the role of local human capital in facilitating the export diversification improvement effect of foreign direct investment (FDI) in African countries. To this end, we use a panel smooth transition regression (PSTR) model which is able to deal with the heterogeneity issue associated with the cross-country data. Based on a sample of 30 African countries over the period 1996–2019, the results show that there is a minimum threshold of human capital beyond which the export diversification enhancing effect of FDI is unlocked in African countries. In other words, only countries located above a certain threshold of human capital benefit from the positive effect of FDI on export diversification. These results suggest that policymakers in African countries should focus on improving the conditions for acquiring local human capital (education and health) in order to extract economic gains from FDI.