David Aboagye Danquah

This study investigates the direct and moderating effects of financial development (FD) and human capital development (HCD) on foreign direct investment (FDI) and identifies the human capital development threshold that triggers a significant impact on FDI in sixteen emerging economies from 2010 to 2023. Panel threshold and panel-corrected standard error regression methods are employed to explore these factors’ direct and conditional effects on FDI. The findings indicate that, initially, FD and HCD negatively affect FDI. This can be attributed to short-term costs associated with structural adjustments and economic instability periods for the selected emerging economies. However, when these variables were interacted, their impact on FDI became positive with a total effect of 1.404, revealing the complementary effect of FD and HCD on FDI. Furthermore, a critical threshold was identified for HCD (0.7919), beyond which its impact on FDI becomes positive, facilitating long-term economic gains. Similarly, FD shifts from a negative to a positive effect as financial systems achieve greater stability and efficiency. The study emphasizes the importance of strategic investment in human capital and efforts to enhance financial sector stability to attract and sustain FDI in emerging markets. It reveals that this approach increases FDI inflows and ensures sustainable economic development over time. The study offers critical insights for policymakers to prioritize structural reforms in education, workforce skills, and financial governance to create an enabling environment for FDI. Furthermore, it highlights the relevance of understanding threshold dynamics to design targeted policies that maximize economic returns from foreign investment in emerging economies.