Heterogeneity in the Causal Link between FDI, Globalization and Human Capital: New Empirical Evidence Using Threshold Regressions

Abstract

Human capital formation in developing countries is a policy instrument to promote economic progress. In recent decades, FDI can act as a mechanism for transmitting human capital in the context of highly globalized countries. Extensive literature indicates that the formation of human capital is one of the most effective mechanisms for promoting structural change in countries. This research examines the causal link between FDI flows, globalization, and knowledge. This relationship is moderated by the index of electoral democracy, employment in agriculture, rent from natural resources, export diversification, and fertility. We employ a set of threshold regressions based on the idea that FDI levels will be significant and permanent as long as FDI transmits knowledge to recipient countries from a substantial level of FDI. The results show a threshold effect in the electoral democracy index and foreign direct investment at the global level and high- and upper-middle-income countries. In addition, we found a threshold effect for the electoral democracy index in the East Asia Pacific regions and the Middle East and North African countries. There is a threshold effect in East Asia, the Pacific, and Latin America in FDI. Based on the results, policymakers should promote FDI and electoral democracy flows above the threshold to encourage the transfer of human capital in the countries analyzed.