The contribution of human capital to foreign direct investment inflows in developing countries
Journal of Intellectual Capital
ISSN: 1469-1930
Article publication date: 3 May 2021
Issue publication date: 17 January 2022
Abstract
Purpose
This paper is about the effect of human capital on foreign direct investment (FDI). The purpose of this paper is to find out if developing countries with high levels of human capital (educated people and well-trained labour force) are more successful in attracting FDI. The underlying hypothesis has been tested repeatedly without reaching a consensus view or providing an answer to the basic question. This is to be expected because FDI is determined by a large number of factors, making the results sensitive to the selected set of explanatory variables, which forms the basis of the Leamer (1983) critique of the use of multiple regression to derive inference. Furthermore, confirmation bias and publication bias entice researchers to be selective in choosing the set of results they report.
Design/methodology/approach
The technique of extreme bounds analysis, as originally suggested by Leamer (1983) and modified by Sala-i-Martin (1997), is used to determine the importance of human capital for the ability of developing countries to attract FDI. The authors use a cross-sectional sample covering 103 developing and transition countries.
Findings
The results show no contradiction between firms seeking human capital and cheap labour. No matter what proxy is used to represent human capital, it turns out that the most important factor for attracting FDI is the variable “employee compensation”, which is the wage bill, implying that multinational firms look for cheap and also skilled labour in the host country.
Originality/value
In this paper, the authors follow the procedure prescribed by Leamer (1983), and modified by Sala-i-Martin (1997), using extreme bounds analysis to distinguish between robust and fragile determinants of FDI, with particular emphasis on human capital. Instead of deriving inference from one regression equation by determining the statistical significance of the coefficient on the variable of interest, the extreme bounds or the distribution of estimated coefficients are used to distinguish between robust and fragile variables. This means that emphasis is shifted from significance, as implied by a single regression equation, to robustness, which is based on a large number of equations. The authors conduct tests on three proxies for human capital to find out if they are robust determinants of FDI and also judge the degree of robustness relative to other determinants.
Keywords
Acknowledgements
The authors are grateful to two anonymous referees for their comments on the original version of this paper.
Citation
Abbas, A., Moosa, I. and Ramiah, V. (2022), "The contribution of human capital to foreign direct investment inflows in developing countries", Journal of Intellectual Capital, Vol. 23 No. 1, pp. 9-26. https://doi.org/10.1108/JIC-12-2020-0388
Publisher
:Emerald Publishing Limited
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