Investigating the Impact of Foreign Direct Investment and Human Capital on Export Diversification: A Panel Smooth Transition Regression (PSTR) Approach
Keywords:
Foreign direct investment, human capital, threshold level, export diversification, panel smooth transition regressionAbstract
This study aims to examine the impact of foreign direct investment (FDI) and human capital on export diversification in the Persian Gulf countries, with emphasis on the threshold effect of human capital. An applied econometric design was employed using annual panel data from eight Gulf countries (Iran, Iraq, Saudi Arabia, Oman, Qatar, Kuwait, Bahrain, and the UAE) covering 2000–2022. The Panel Smooth Transition Regression (PSTR) model was applied to detect nonlinearity and determine the human capital threshold influencing the FDI–export diversification relationship. Control variables included real per capita income, trade openness, infrastructure, institutional quality, financial development, and natural resource rents. The results revealed a nonlinear and threshold-dependent relationship between FDI, human capital, and export diversification. The estimated human capital threshold was 4.85. Below this level, FDI significantly stimulated export diversification; beyond it, the role of FDI diminished while human capital became a strong positive determinant. Real per capita income, trade openness, infrastructure, and institutional quality consistently had positive effects across regimes, whereas natural resource rents exerted a persistent negative impact. Achieving sustainable export diversification requires a phased policy approach: in early development stages, targeted attraction of FDI should modernize production capacity; at advanced stages, enhancing human capital quality enables economies to innovate and reduce reliance on external investment.
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Copyright (c) 2025 Khaldoon Abdullah Khalaf (Author); Saeed Daei-Karimzadeh (Corresponding author); Abdul Rezzaq Hamad Hussein, Sara Ghobadi (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
