Foreign direct investment, inequality and human capital accumulation

Luseni Kamara, Fordham University


In recent years, a considerable amount of literature on the links between foreign direct investment, schooling, inequality and growth has flourished. The emerging consensus is that equality enhances growth, also, that foreign direct investment and schooling enhance growth, but disagreement exists on the underlying mechanisms. In this paper, we aim to provide the reader with new empirical evidence from a panel analysis of countries. First, we try to improve upon the accuracy of previous empirical models by using new data on inequality extracted from University of Texas. Second, we test the relevance of the theoretical models proposed in the literature to explain the FDI, schooling, inequality and growth relationships. Finally, using multivariate vector auto regression model, the paper further uses data from fifty countries to empirically examine the causality between foreign direct investment and gross domestic product, foreign direct investment and human capital, and gross domestic product and human capital. Results suggests that FDI is positively associated with economic. We also find a positive association between returns on education with FDI, and a positive relationship between FDI and inequality. In the model presented in this paper, the role of human capital endowment and FDI are important if not crucial, since the distribution of income and wages may be given by the distribution of human capital and FDI. Interestingly enough, we find that inequality is positively associated with growth as suggested by Kristin J. Forbes (2000). Also, findings suggest that FDI granger-causes economic growth and growth granger causes FDI. Further investigations suggest that there is also bi-directional granger causality between FDI and schooling, and economic growth and schooling.

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Recommended Citation

Kamara, Luseni, "Foreign direct investment, inequality and human capital accumulation" (2006). ETD Collection for Fordham University. AAI3216917.