Foreign Aid–Human Capital–Foreign Direct Investment in Upper-Middle-Income Economies

The study examined the influence of foreign aid on foreign direct investment (FDI) in upper-middle-income economies using panel data (2011–2021) analysis methods such as two-stage least squares (2SLS) and system GMM (generalized methods of moments). The study also explored if human capital development enhanced foreign aid’s influence on FDI in upper-middle-income economies during the same timeframe. The conflicting, divergent, and mixed results and views on the relationship between foreign aid, human capital development, and foreign direct investment (FDI) motivated the undertaking of this study to fill in the existing gaps. Apart from FDI enhanced by its own lag, foreign aid significantly improved FDI (under system GMM). FDI was also improved significantly by human capital development across all two panel methods. Under 2SLS and system GMM, foreign aid significantly improved FDI through the human capital development channel. To promote FDI inflows, upper-middle-income economies should develop and implement policies aimed at attracting foreign aid and enhancing the development of human capital. The study suggests that further research on threshold regression analysis on foreign aid–FDI nexus in upper-middle-income economies could better help develop an FDI policy that is beneficial toward economic growth.