Foreign direct investment and country-specific human capital

Abstract

This paper exploits an international bilateral data set over the period 1963-1998 to investigate the relationship between foreign direct investment (FDI) and foreign-educated labor in an FDI host country. Workers educated abroad acquire country-specific human capital that is more productive in the host country of study. A foreign subsidiary sharing a parent firm's technology will invest more if it has more foreign-educated labor, since it can utilize this labor more productively because of the country-specific human capital. Consistent with our predictions, our empirical findings show that foreign-educated labor accounted for a sizable portion of growth in FDI flows. © 2012 Western Economic Association International.