Effect of foreign capital inflows on human capital development: a study of sub-saharan Africa

Abstract

A nation's socio-economic growth depends on its level of investment in the education and health of its population. Thus, human capital development is central to the government's policy agenda, as manifested by the massive budgetary allocations in education, vocational training, and health care. Though previous studies have reported tremendous improvement in the quality of human capital in developed countries, over the past four decades, the level of human capital development in Sub-Saharan African remains unsatisfactory mainly because of budgetary constraints. Interestingly, the region receives a fair share of foreign capital transfers such as foreign direct investment, migrants' remittances, and official development assistance. Therefore, the main objective of this study was to assess the impact of foreign capital flows on human capital development in Sub-Saharan Africa (SSA). The specific objectives were to determine the effect of foreign remittance, official development assistance and foreign direct investment on human capital development in Sub-Saharan Africa. The study was grounded on the human capital theory, dependency theory and modernization theory. The study used an explanatory and descriptive research design. Secondary data was employed and analyzed using multiple regression analysis, and the results of the Hausman test guided the choice between fixed effect and the random effect. The study's findings showed that foreign remittances had a positive and significant impact on human capital development (β= 0.0036, ρ<0.05).Conversely, the effect of foreign direct investment (β=-0.0013, ρ<0.05) and official development assistance (β= -0.0026, ρ<0.05) was negative and significant. Therefore, the study concludes that the impact of foreign capital on human capital development in SSA varies depending on the type of external capital. The study recommends that Sub-Saharan African nations formulate necessary policy interventions to leverage foreign capital to improve their level of human capital development. Specifically, there is a need to strengthen the institutions of governance and invest more in human capital formation since they determine the magnitude of external capital inflow and a country's absorptive capacity.