Modelling the impact of foreign direct investment and human capital on economic growth: empirical evidence from the Philippines

This paper empirically investigates the impact of foreign direct investment (FDI) and human capital on economic growth in the Philippines. An economic growth model for the Philippines is specified and estimated by a canonical cointegrating technique and employing annual data spanning the period 1965-2010. Our empirical results indicate that FDI is an important vehicle for achieving economic growth in the Philippines, but only when there is sufficient absorptive capacity created by increased human capital and infrastructure development. The other key factors influencing Philippine economic growth are economic growth in its major trading partners, political climate and prevailing economic conditions within the economy. The relative size of government investment is found to crowd-out private investment, thus suggesting the need for government investment to be directed at human capital and infrastructure development as this has the potential to attract FDI and thus achieve sustained economic growth and development in the Philippines.