Role of Human Capital Endowment in the FDI-Poverty Nexus in Sub-Saharan Africa: An Interactive and Threshold Effect Analysis

Abstract Foreign Direct Investment (FDI) is essential for economic growth and poverty alleviation in developing regions, particularly in Sub-Saharan Africa (SSA). However, despite increased capital inflows, SSA still has the highest number of extreme poor. The impact of FDI on human welfare remains unclear, influenced by how benefits are distributed and the absorptive capacity of host countries, notably human capital. This study defines the threshold of human capital necessary to optimize FDI benefits, focusing on per capita income and income inequality. Using an interactive and threshold effect analysis with the Sequential Two-Stage Generalised Method of Moments (SGMM) and Dynamic Panel Threshold Modelling (DPTM), it was found that SSA countries must achieve a human capital index threshold of about 17 (out of 100) to realize positive impacts from FDI. Below this threshold, FDI negatively affects per capita income; above it, FDI promotes economic growth but worsens income inequality due to its favoring of skilled workers, which undermines the expected benefits of poverty reduction. Therefore, FDI alone cannot ensure comprehensive development. To address this, policymakers should set the 17-point human capital index as a minimum target and implement a dual strategy: enhancing the education system to meet the demands of new students and directing foreign investment toward sectors like agriculture and industry, which can generate jobs and reduce income inequality.