Human Capital and the Quality of Foreign Direct Investments

Abstract

The purpose of this study is to analyse to what extent the difference between the quantity and quality of Human Capital (HC) is relevant to the quantity and quality of inward Foreign Direct Investments (FDI). Most developing economies keep attracting multinational enterprises (MNEs) with short-term goals in labour-intensive industries, with little or no embodiment in the local environment. As such, low-value-adding investments erode the national HC base, leading to the vicious cycle of low-quality investments. The legitimate policy question is whether countries are unable to attract high-quality investment due to the low quality of HC. This study, which combines traditional and more advanced proxies of HC, considers a sample of 54 developed and developing countries. It is found that the role of HC quality in FDI attraction is industry-specific and that it varies depending on the country’s level of development. The quality of HC seems to matter relatively more for high-quality FDI than for overall FDI.