The impact of Foreign Direct Investments on the Human Development Index in Africa: a dynamic panel analysis

While numerous studies have analyzed the relationship between Foreign Direct Investments (FDI) and economic growth, researchers have devoted very little attention to the impact of FDI on other dimensions of welfare, such as health and education. In this paper, we explore the effects of FDI on the UNDP Human Development Index (HDI) and its three components (namely income, health and education) in African countries by using dynamic models for a panel dataset of 35 countries observed in the 1991-2017 period. In doing so, we take into account the very limited cross-sectional dimension of the dataset and the ensuing pitfalls of IV/GMM-like estimators by relying on the Least Squares Dummy Variables Corrected (LSDVC) estimator (Kiviet, 1995). The analysis shows, overall, a positive but quite weakly significant effect of FDI on the HDI. When we consider the different components of the Index, we ascertain that the positive effect is, predictably, mainly determined by the Income component, which is positively and significantly affected by FDI flows across all model specifications. Less predictably, we detect a positive, although marginally significant in just a few of our specifications, effect on the health component of the Index. The education dimension does not seem affected by FDI. To our knowledge, this is among the first attempts to disentangle the effect of FDI on the different components of the HDI of African countries, and the first to do it by taking into account the peculiar characteristics of the dataset. Future research should be aimed at further exploring the dynamics of the individual components of the Index, analyzing the diversified effects of FDI in different industries and from different origin countries, as well as exploring the heterogeneity given by the very different FDI destinations included in the sample.