Is the interaction between human capital and financial development one of the determinants of FDI in emerging markets?

Abstract

The study investigated the determinants of foreign direct investment (FDI) and whether the interaction between human capital and financial development enhances FDI into the emerging markets. The dynamic generalised methods of moments (GMM) framework was employed with panel data from 1994 to 2014. Gross domestic product (GDP) per capita, savings, trade openness, human capital development and the lag of FDI had either a positive and significant or positive and non-significant influence on FDI. The interaction between: 1) human capital development and stock market value traded; 2) human capital development and stock market capitalisation enhanced both the size and significance on FDI. Moreover, the interaction between banking sector variables and human capital development reduced the negative impact of banking sector development on FDI. Emerging markets are therefore urged to enhance economic growth, savings mobilisation, trade openness, human capital and financial development and to reduce inflation levels in order to increase FDI.