FDI and human capital development: a tale of two Southeast Asian economies

Abstract

Middle-income economies must prioritise human capital development to ensure long-term sustainable growth and economic upgrading. While foreign direct investment (FDI) is believed to aid this endeavour, its impact on technical vocational education and training (TVET) remains understudied. This research explores the influence of FDI by multinational enterprises (MNEs) at various stages of global value chains (GVCs) on TVET graduate numbers in Vietnam and Indonesia from 2006 to 2016. Our findings reveal that greenfield FDI plays a role in shaping TVET supply, with heterogeneous effects across different GVC segments and subnational regions. Specifically, FDI in logistics, sales and marketing, and support and servicing are associated with an increase in the supply of TVET graduates in the region, whereas FDI in headquarters and production may lead to a decline in technical skills. To address these dynamics, public policies should prioritise flexible education systems capable of adapting to MNEs’ evolving skill demands. By doing so, these economies can elevate local human capital levels and avoid the stagnation often associated with middle-income traps. This research underscores the importance of aligning policy with the needs of a rapidly changing global economy to foster sustainable development.