Title

The Relationship between Foreign Direct Investment and Human capital: A Theoretical and
Comparative Approach

ABSTRACT
Globalization is an inevitable trend, which has led to the surge of Foreign Direct Investment (FDI) in
developing countries. FDI proves to be an important factor in encouraging economic growth, especially
in countries with limited capital and becomes a criterion in assessing a countrys ability to attract
investment. For a country to attract more foreign investors, Human capital cannot be ignored. Human
capital has a two-way and complicated relationship with FDI, therefore it is essential to examine the
relationship to make the best use of Human capital advantages in attracting more investment.
This study adopts a theoretical and comparative approach to identify the effects of FDI on Human
capital and vice versa. First, theories are provided about the definition of FDI, Human capital, major
attributes of Human capital and the relationship between FDI and Human capital in general. Second, we
go further to summarize and analyze practical results from studies carried out by multiple researchers,
such as Chen (2013), Majeed and Ahmad (2008), Blomstrom and Kokko (2003) within the first 15
years of the 21st century to have a comprehensive look at the relationship between FDI and Human
capital. We link the results to the case of Vietnam not only to provide an example but also shows the
applicability of this study. We gather some noteworthy results after this study. In particular, health
expenditures and FDI have a positive association, while labor cost is negatively associated with FDI and
the influence of literacy on FDI is not significant. The notion that FDI raises the quality of various
aspects of Human capital is controversial among Blomstrom and Kokko (2003), Herzer and Nagel
(2012), Gittens and Pilgrim (2013) and Prez-Segura (2015).

CONTENT
INTRODUCTION.......................................................................................................................................1
BACKGROUND.........................................................................................................................................2
Definition of FDI.....................................................................................................................................2
Classification of FDI................................................................................................................................2
Definition of Human capital....................................................................................................................3
Characteristics of Human capital.............................................................................................................3
Human capital Components.....................................................................................................................4
1.

2.

THEORETICAL FRAMEWORK........................................................................................................4
1.1.

The effects of Human capital on FDI............................................................................................5

1.2.

The effects of FDI on Human capital............................................................................................6

1.2.1.

The effects of FDI on Human capital level - formal education.................................................7

1.2.2.

The effects of FDI on Human capital level working skills....................................................7

1.2.3.

The effects of FDI on Health.....................................................................................................8

THE RELATIONSHIP BETWEEN HUMAN CAPITAL AND FDI...................................................8

2.1.

The effects of Human capital on FDI............................................................................................8

2.1.1.

Health expenditures.................................................................................................................11

2.1.2.

Literacy....................................................................................................................................11

2.1.3.

Labor cost................................................................................................................................11

2.2.

The effects of FDI on Human capital..........................................................................................12

FUTURE WORK.......................................................................................................................................16
CONCLUSION..........................................................................................................................................17
REFERENCE LIST...................................................................................................................................18

LIST OF TABLES
Table 1 The effects of Human capital on FDI............................................................................................11
Table 2 The effects of FDI on Human capital............................................................................................15

TABLE OF ABBREVIATIONS
FDI
GDP
HCI
HDI
IMF
M&A
MNC
OECD
UK
UNCTAD

Foreign Direct Investment

Gross Domestic Product
Human Capital Index
Human Development Index
International Monetary fund
Merger & Acquisition
Multinational Corporation
Organization for Economic Co-operation and
Development
United Kingdom
United Nations Conference on Trade and
Development

INTRODUCTION
In the last 20 years, the huge inflow of Foreign Direct Investment (FDI) has been witnessed not only
from developed countries to developing countries but also among developed countries. Human capital
plays an increasingly vital role in foreign investors decision to do business in one certain country. This
study examines the effects of Human capital on FDI and vice versa from 2000s onwards, since it is
realized that Human capital and FDI has a two-way association. The objective of this study is to provide
a comprehensive view about the negative and positive implications triggered by the inflow of FDI on
Human capital and how a country can make use of its Human capital advantages to attract more
investment from other countries. This is very important for developing countries which lack sufficient
capital, infrastructure and technology for industrial and service development.
However, the relationship between Human capital and FDI is difficult to figure out since studies were
often carried out on a small scale, and each country has different characteristics in Human capital which
lead to different results when attracting FDI. In this study, we will compare theories about the
relationship between FDI and Human capital before going on to analyze practical works of research
from various economists. We come to the result that at least three factors of Human capital, which are
Health expenditure, Literacy and Labor cost influence the extent to which the host country can attract
foreign investors; meanwhile FDI provides more conditions for education development and,
subsequently, human capital quality, but it creates health problems for local people as a result of the
establishment of more factories.
Our study will be divided into two main parts:
First, theoretical framework about the relationship between FDI and Human capital and vice versa
Second, analysis of studies about the relationship between FDI and Human capital and vice versa

BACKGROUND
Definition of FDI
There is not a solely definition for Foreign Direct Investment (FDI). Below are two common definitions
of FDI from IMF and OECD.
FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the
economy of the investor. Further, in cases of FDI, the investors purpose is to gain an effective voice in
the management of the enterprise. The foreign entity or group of associated entities that makes the
investment is termed the "direct investor". The unincorporated or incorporated enterprise-a branch or
subsidiary, respectively, in which direct investment is made-is referred to as a "direct investment
enterprise" (IMF, 1993).
FDI is defined as cross-border investment by a resident entity in one economy with the objective of
obtaining a lasting interest in an enterprise resident in another economy. The lasting interest implies the
existence of a long-term relationship between the direct investor and the enterprise and a significant
degree of influence by the direct investor on the management of the enterprise. Ownership of at least
10% of the voting power, representing the influence by the investor, is the basic criterion used.(OECD,
2013).
Although two definitions above seems to be different in terms of words, they all mention the
determinants of FDI. According to the IMF and OECD definitions, direct investment reflects the aim of
obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is
resident in another economy (the direct investment enterprise). The lasting interest implies the
existence of a long-term relationship between the direct investor and the direct investment enterprise and
a significant degree of influence on the management of the latter. Direct investment involves both the
initial transaction establishing the relationship between the investor and the enterprise and all subsequent
capital transactions between them and among affiliated enterprises, both incorporated and
unincorporated.
Classification of FDI
Strategically, FDI comes in three types: Horizontal, vertical and conglomerate (Tutorialspoint, 2015).
Horizontal In case of horizontal FDI, the company does all the same activities abroad as at home. For
example, Toyota assembles motor cars in Japan and the UK.
Vertical in vertical assignments, different types of activities are carried out abroad. In case of forward
vertical FDI, the FDI brings the company nearer to a market. In case of backward Vertical FDI, the
international integration goes back towards raw materials.
Conglomerate in this type of investment, the investment is made to acquire an unrelated business
abroad. It is the most surprising form of FDI, as it requires overcoming two barriers simultaneously
one, entering a foreign country and two, working in a new industry.

FDI can take the form of greenfield entry or takeover.

Greenfield entry or green field investment is a form of foreign direct investment where a parent
company starts a new venture in a foreign country by constructing new operational facilities from the
ground up. In addition to building new facilities, most parent companies also create new long-term jobs
in the foreign country by hiring new employees.
Foreign takeover means acquiring an existing foreign company. Foreign takeover is often called
mergers and acquisitions (M&A) but internationally, mergers are absolutely small, which accounts for
less than 1% of all foreign acquisitions.
Definition of Human capital
The origin of Human capital came with the emergence of classical economics in 1776 and the concept
developed from time to time. There are multiple viewpoints about the definition of Human capital.
The first viewpoint is based on the individual aspects. Schultz (1961) recognized the Human capital as
something akin to property against the concept of labor force in the classical perspective. There is the
second viewpoint on Human capital itself and the accumulation process of it. This perspective stresses
on knowledge and skills obtained throughout educational activities such as compulsory education,
postsecondary education, and vocational education (Fuente and Ciccone, 2002, as cited in Alan et al.,
2008). The third is closely linked to the production-oriented perspective of Human capital. Frank and
Bemanke (2007) define that Human capital is an amalgam of factors such as education, experience,
training, intelligence, energy, work habits, trustworthiness, and initiative that affect the value of a
worker's marginal product, while another definition of which is the stock of skills and knowledge
embodied in the ability to perform labor so as to produce economic value (Sheffrin, 2003).
Consequently, Human capital simultaneously includes both the instrumental concept to produce certain
values and the endogenous meaning to self-generate it. The Human capital is a synonym of knowledge
embedded in all levels such as an individual, an organization and/or a nation.
Characteristics of Human capital
Indigenous Characteristics
According to Crawford (1991), compared to physical labor, Human capital includes expandable, selfgenerating, transportable, and shareable characteristics.
First, the expandable and self-generating characteristics of Human capital are closely linked to the
possibility that the stock of knowledge increases individuals Human capital. Furthermore, the increase
of Human capital can be expanded by either endogenous or exogenous factors. It is possible that original
knowledge can be continuously developed through external knowledge, information, skills, experiences,
and other knowledge-based factors as well. In the economic perspective, the characteristic of Human
capital focusing on knowledge can be a core element to solve problem of scarcity which little material
is equivalently distributed to economic agents. Throughout expanding and self-generating the Human
capital, it is sufficiently possible that the portion of that capital as an economic agent is extended.
Second, the transportable and shareable characteristics of Human capital mean that the original holder of
knowledge can distribute his/her knowledge to others. Consequently, the former two characteristics
extend the volume of Human capital, and the latter two expand the range of Human capital.

Human capital is determined by factors such as a person's experience, education, training, skills and
health. For example, the income of a person holding a bachelor degree has shown to be higher in most
cases than a person with less education. Also, a person's experience in a certain industry can add value to
that person's Human capital compared to the entry level.
Human capital Components
A majority of economists and businessman nowadays acknowledge the importance of intangible capital
which is the decisive factor contributing comparative advantage for each corporation, beside physical, or
tangible, asset explicitly stated on the financial statements. The intangible capital is divided into 3
categories: Human capital, internal capital, and external capital (Sveiby, 2001).
If Internal capital (eg. data bases, patents, procedures, systems, models) and External capital (eg.
customer, supplier, stakeholder relationship) refer to something stay and stick to the company, Human
capital is distinct from the other two in the sense that it belongs to the person possessing it and cannot be
owned by the organization, the intellectual capital that goes home every night, is accumulated over
time, either unique among individuals (like a talent) or transferable through training (like knowledge, or
skill). To break Human capital into smaller components, there are several ways, each of which follows
different logic and is used for different purposes.
According to World Economic Forum 2013, Human capital is looked through an idea of Human capital
Index which includes four factors:
1. Education
2. Health and wellness
3. Workforce and employment
4. Enabling environment
Based on these four pillars, the HCI looks at the total endowment on Human capital of a nation, and tries
to understand along the overall lifetime of a person, how much he is invested in and how well this
investment is leveraged by a particular economy. (World Economic Forum, 2013)
In 2015, however, World Economic Forum focuses only on two instead of four pillars: learning and
employment outcomes outputs - rather than on inputs or enabling environment variables. The subcomponents of each category are also varied:
1. Learning: includes four sub-components Enrolment in education and Quality of
education, which impact the future labour force; the Educational attainment of those
already in the labour force; and Workplace learningthe level of opportunity in a country
to acquire new skills both through formal on- the-job training as well as through learning-bydoing, tacit knowledge and learning from colleagues.
2. Employment Outcomes: includes three sub-components Economic participation measuring the extent to which people of all ages and backgrounds are taking part in a
countrys labour market; Skills dimension assesses whether peoples knowledge and
education are well-matched to the economic profile of the country as well as the quality of
the employment in which people find themselves; while Vulnerability sub-theme measures
the incidence of exploitative employment relations stifling individuals long-term potential.

1. THEORETICAL FRAMEWORK
In recent years, the development of Human capital in the world has proven to significantly affect the
inwards of FDI and vice versa, and the following Theories section of the report will mainly focus on
these two-way impacts.
1.1. The effects of Human capital on FDI
HUMAN CAPITAL HAS A SIGNIFICANT EFFECT ON ECONOMIC GROWTH
Human capital plays an indispensable and crucial role in the process of economic growth and
development, thus leads to the increase in social welfare, and to be more specific, the accumulation of
Human capital is thought to be capital deepening according to Dorozynski and Dorozynska (2014),
which eventually brings about a period of accelerated growth. Particularly, Human capital is closely
related to the three potential mechanisms, namely: enhancement of workforce productivity, facilitation
of innovative activities, and adoption of new technology in production process. However, the
development in Human capital is also seen as an element that makes the country less attractive to FDI
due to the high labor cost.
POSITIVE
Enhancement of workforce productivity Health expenditures
The rise in health spending as well as insurance policy, moreover, has significant impacts on Human
capital. According to Majeed and Ahmad (2008), countries with higher health expenditures will be able
to attract more inflow of foreign investment. This statement is reasonable since people who received
better health care and are promised to be assigned a good hospital for insurance tend to devote more to
their work due to improved mental and physical condition, and increase their productivity. To be more
specific, these people will have a more relaxed mind since they do not have to worry much about their
future health and moreover, they should receive proper hospital service when they have any health
problems. The level of output, as a result, will also increase.
Facilitation of innovative activities - Literacy
Research and development (R&D) activities are Human capital intensive in nature according to
Rizvanolli (2012). However, this process of research only has special impacts on the long-run, since it
takes time for people to come up with innovative ideas.
Ideas, since the beginning of time, have proven to be the key of every development. In particular, they
are often referred as the advancement of technology of production - a given bundle of inputs in order to
produce better or more outputs. As a result, many countries government are willing to give up a large
sum of money in order to create ideas, and the most common approach is to invest in R&D, which is
closely linked to Human capital. The aforementioned innovative ideas, thereafter, will boost peoples
expenditures on the products and services, and eventually improve the economy significantly.
However, in order to come up with those innovations, it is necessary that there is enough money spent
on education since only when receiving enough education service can they become high quality labor
force and create valuable ideas for innovation process.

The expenditures on schooling, employee training and work experience is generally thought to improve
the labor forces skill (Rizvanolli, 2012). Productive capacity, therefore, determines workers wage
levels, increases their spending and in turn boosts the economy.
Adoption of technology in production process
However, the main purpose of Human capital is not only to enable the labor force to work more
fruitfully but also enable them to adapt to changes and become skillful in various tasks. To be more
specific, the increase in education quality not only helps them learn new skills, but also helps them learn
the method to adopt new changes and adapt new technology faster. This skill will, as a result, help
workers, especially managers, have the ability have critical choices and judgments and thereby reduce
the companies risk and increase the likelihood of introducing appropriate and helpful technology.
AS A RESULT, THE DEVELOPMENT IN HUMAN CAPTAL HAS POSITIVE EFFECTS ON
FDI INFLOWS
Countries with a high level of Human capital are able to achieve higher growth rates through their
ability to attract foreign enterprises and assimilate new technologies with efficacy, since Multinational
Corporations are to invest in those countries which are potential to yield higher rate of returns.
From a micro point of view, Human capital affects workers salaries, and from a macro point of view, it
can also impacts locations of business, innovation transfer or technology adaptation. Those criteria are
what other countries judge a host country in order to make a decision whether or not to directly invest in
the nation according to Eicher and Kalaitzidakis (1997).
As mentioned above, Human capital helps increase social welfare and peoples standards of living.
Countries with good Human capital also means having higher salaries and living standard to be
compared with other countries and become potential markets for investors. Investors, therefore, will
have motivation to build roads or set up their business, since they believe that the countries they choose
to invest have the capability to pay back what they gave and may yield handsome profits.
Workers who lack skills and have insufficient training hours adversely affect the rate of FDI return, and
thus deter capital inflows. Therefore, developing countries with higher levels of Human capital tend to
attract more FDI than others. Type of investment, for example, may also be decisive for the investors.
With labor-intensive projects, investors tend to seek for those of high level of education, thus may be
able to perform well in the given tasks and produce high level of output. With capital-intensive projects,
it is required that the workers have been trained carefully in order to be able to function the machines
properly; not only to increase productivity, but also reduce risk of damaging those expensive machines.
This way, firms can reduce cost of educating and training from the beginning, thereby saving a great
amount of money.
NEGATIVE LABOUR COST
Despite all of their positive effects, Human capital also has negative impacts on the attraction of FDI.
According to Khachoo and Khan (2012), high level of Human capital can lead to the decrease in a
countrys total amount of FDI. The main reason for this is probably the high labor cost this development
could lead to. To be more specific, as government spends more on health, insurance or education
service, labor force will have better capabilities and apparently, higher productivity. As a result, the cost
of hiring these workers will also increase and the home country who is seeking for a place to invest
with the lowest cost as possible, will see that nation as a less attractive host country. This, in turn, would

have negative impacts on the FDI of the developing nations, since the developed ones are unable to see
potentials in making profits in those countries.
1.2. The effects of FDI on Human capital
Human capital of a country, which is defined by Berg (p. 226, 2001) as the quality of the labor force, its
accumulated experience and Human capital, its education system, and so on, that determines an
economys ability to create new ideas and adapt old ones is strongly affected by the inflow Foreign
Direct Investment from other countries.
It is undoubted that inward FDI may lead to Human capital development for most of the time. However,
sometimes it may not, and it may even lead to the opposite. The potentially positive effects of FDI
include inducing incumbent firms to upgrade their technology, and spill-over benefits so that local
competitors can learn from Multinational Corporations technological and managerial practices. The
potentially negative effects include the possibility of Multinational Corporations deliberately raising
concentration levels, forcing competitors out of business by predatory pricing, taking away skilled labor
and R&D staff from local firms, or engaging in restrictive business practices which, among other things,
may deter technological development.
Coming along with the stream of inward FDI is the rise of multinational corporations. It is well known
that MNCs undertake a major part of the worlds private R&D efforts and produce, own, and control
most of the worlds advanced technology. More specifically speaking, foreign MNCs may:
Raise efficiency by breaking the bottleneck-mode of supply in the host countries;
Bring in new know-how techniques to the host countries by introducing new technologies and training
labor forces who later will work for local firms;
Either break down monopolies and encourage competition or create a more monopolistic industry
structure, depending on the power and responses of the local companies;
Transfer techniques for inventory and quality control and bring in standardization to their local
suppliers and distribution channels; and,
Get local firms to increase their management ability, or to adopt some of the marketing techniques used
by MNCs, either on the local market or internationally.
To be simpler, there are several ways that inward FDI can affect Human capital of the host countries. We
can name some, such as:
1.2.1. The effects of FDI on Human capital level - formal education
While the impact of FDI on primary and secondary education is not significant, there is increasingly
clear evidence that FDI may noticeably affect the tertiary education in their host countries. The main
reason here might be rooted from the change in the demand side. The rise of MNCs also leads to the
increase in demand of highly skilled workers in fields such as natural sciences, engineering, and
business sciences, etc., which creates incentives for college students to complete tertiary training.
Moreover, to match the high demand for skilled labor from MNCs, governments may choose to invest
more in higher education.

The relationship between FDI and higher education appears to be even stronger. Except for giving out
encouraging programs, scholarships and sponsoring the formal education; MNCs are also take strong
moves in supporting the development of universities and related institutions in several ways. In fact,
UNCTAD (p. 218, 1994) reports that the MNCs demand for highly trained graduates manifests itself in
the form of financial support, particularly to business schools and science facilities, the provision of
assistance and advice through membership of advisory boards, curriculum review committees, councils
and senates.
1.2.2. The effects of FDI on Human capital level working skills
Most MNCs provide some training for their employees, although the amount and type vary depending
on industry, mode of entry, size and time horizon of investment, type of operations, and local conditions.
The level of the host country employees general and cognitive skills is a particularly important
determinant of the amount of training undertaken, since a relatively high level of education reduces the
cost of further training and raises the expected benefits. Competition is another important factor. Firms
that are protected from international or domestic competition are less likely to invest in costly training
programs. However, the evidence on spillovers from the MNC affiliates training of local employees is
far from complete, and comes mainly from developing country studies. Considering that knowledge is
scarcer at the same time as the public education systems in developing countries are relatively weaker, it
is also possible that spillovers from training are relatively more important there.
Many of the studies undertaken in developing countries have emphasized the spillovers of management
skills. For instance, Gershenberg (1987) examines MNCs and the training and spread of managerial
skills in Kenya. From detailed career data for 72 top and middle level managers in 41 manufacturing
firms, he concludes that MNCs offer more training of various sorts to their managers than private local
firms do, although not more than joint ventures or public firms. Moreover, UNCTAD (1994) reports that
the MNC affiliates training expenditures per employee often match or exceed those of the parent
companys own training expenditures in the home country. Managers also move from MNCs to other
firms and contribute to the diffusion of know-how. Of the managers in private local and public firms
who had training from elsewhere, the majority had received it while working for MNCs - joint ventures,
on the other hand, seemed to recruit mainly from public firms.
1.2.3. The effects of FDI on Health
To be exact, it is hard to see the direct effect of FDI on Health. However, the impact that FDI can put on
Health can come from several intermediate factors such as income, technology transfer, environment
quality.
Income and Health usually have a closely-related relationship. By natural sense, it is plain to see that
inward FDI, by creating more chances of job for workers and expand the domestic market will lead to a
rise in income. Assume that as one unit of income increases, the expenditure spent on goods that improve
population health; such as food, clean water and sanitation, education, and medical care will go up by one
unit as well, then inward FDI is much likely to improve health. However, the effect decreases with
increasing income, then changes sign and becomes increasingly negative at higher levels. One potential
explanation for this issue might be the workload a worker has to take usually increases as his income
goes up. He will have less time for social interactions and entertainment; he will suffer more stress, less
sleep and more likely eat unhealthy foods due to the lack of time. Thus, the positive relationship between
FDI and Health may not be maintained in high income level countries. Even worse, the positive effect
can be reversed.
Another factor that can strongly affect health is the national environment quality. It is undeniable that
MNCs going along with FDI stream usually create negative impacts on the environment due to the

overexploitation of natural resources and industrial emissions resulted from producing process. This is an
alarming problem in most of the developing countries, including Vietnam, where government regulations
and standards are not tight enough to eliminate negative externalities. In these situations, an increase in
FDI may negatively affect population health in the host countries.
2. THE RELATIONSHIP BETWEEN HUMAN CAPITAL AND FDI
2.1. The effects of Human capital on FDI

Variable

Proxy

Sign of
the
effect

Author
(year)

Title

Methodology

Sample

Main results

Human
capital

Health
expenditures

Positive
(+)

Chen
(2013)

Human
capital

Health
expenditures

Positive
(+)

Majeed
Human
and Ahmad capital
(2008)
Develo
pment
and
FDI in
Develo
ping
countri
es

Pooled-time
series
and
cross-section
data

23
countries
with data from
World
Development
Indicators
2005.

Countries
with higher
health
expenditures
tend
to
receive more
FDI

Human
capital

Literacy

Positive

DOROY
SKA and
DOROY
SKI
(2014)

The
role of
Human
capital
in
attracti
ng
FDI:
the
case of
the
Lodz
region

Direct
questionnairebased study

188 companies
with
foreign
capital (CFCs)
in Lodz

One of the
major
reasons for
locating FDI
entities
in
Poland is the
availability
of
the
workforce
with
adequate
qualification

Determ
inants
of
Foreig

OLS
estimated
method

Provinces of
Vietnam in two
periods: 20012007
and

Higher rate
of
higheducated
labor

(+)

Human
capital

Literacy

Positive
(+)

Nguyen
and
Nguyen
(2013)

Health Two-stage
Low-andA
1%
Costs,
panel
data middle income increase in
Factor model
countries and health
Produc
high-income
expenditure
tivity
countries from links to a
and
1995 to 2010
1.8%
Foreig
increase in
n
FDI inflow
Direct
Invest
ment
Inflows

Random and
quota
sampling

n
Direct
Invest
ment in
Vietna
mese
Provin
ces
recentl
y
Human
capital

Literacy

Positive
(+)

Human
capital

Labor cost

Positive
(+)

Human
capital

Labor cost

Negative
(-)

2008-2010

encourages
FDI but not
significantly

Majeed
Human
and Ahmad capital
(2008)
Develo
pment
and
FDI in
Develo
ping
countri
es

Pooled-time
series
and
cross-section
data

23
countries
with data from
World
Development
Indicators
2005

Education
has positive
effect on FDI
though not
much
significant

Nguyen
The
and
Bui Determ
(2014)
inants
of
Foreig
n
Direct
Invest
ment in
Develo
ping
Countri
es

Panel
data
technique
(Random
effects REM,
Fixed effects
FEM, Pooled
OSL.)

30 developing
countries with
middle
and
low
income
from 2000 to
2002

Labor cost
has positive
correlation
with
FDI
inflows.

Khachoo
Determ
and Khan inants
(2012)
of FDI
inflows
to
develo
ping
countri
es:
a
panel

Panel
data FDI in 32
technique
developing
countries from
1982 to 2008

Higher labor
cost would
discourage
inflows
of
FDI.

Fully
Modified
Ordinary
Least Squares
(FMOLS)

data
analysi
s
Human
capital

Labor cost

Negative
(-)

Human
capital

Labor cost

Ranjan and FDI

Agrawal
Inflow
(2011)
Determ
inants
in
BRIC
countri
es: A
Panel
Data
Analys
is

Negative

Panel
data FDI of BRIC
analysis with countries from
3 methods
1975 to 2009
(exception of
Russia
from
1990 due to
Hausman
unavailability
Specification of data)
Test

Bevan and The

Panel
data
Estrin
Determ (Random
(-)
(2000)
inants
effects REM)
of
Foreig
n
Direct
Invest
ment in
Transiti
on
Econo
mies
Table 1 The effects of Human capital on FDI

FDI
flows
from
18
established
market
economies to
11 transition
economies
over the period
1994 to 1998

Investors are
attracted to
BRIC
countries
where labor
cost is low

Investors are
attracted by
low
labor
costs.

2.1.1. Health expenditures

The first proxy in consideration is health expenditures. Clearly its effect in explaining FDI inflows is
significant. Better health conditions serve as a sign of highly-skilled labor force which attracts foreign
investors in several ways: people with good health are more likely to focus on work, it reduces losses
caused by labors illness, both increase work efficiency and promise high productivity.
Not surprisingly, the result found in reports from different countries confirm the hypothesis. Both reports
of Majeed and Ahmad (2008) and Chen (2013) prove the significant positive association between health
expenditures and FDI. Specifically, according to Chen (2013), a 1% increase in health expenditure
links to a 1.8% increase in FDI inflow. Yet there is a difference in the impact of health expenditures on
FDI in middle-and-low countries and high-income countries, with bigger impacts go to the former. In
other words, with middle-and-low countries, health expenditure is considered an efficient measure of
labor productivity which significantly affects decision of foreign direct investors.

2.1.2. Literacy
The vital role of literacy on Human capital obviously does not need any elucidation. In their report
published in 2008, Majeed and Ahmad estimate the impacts of illiteracy with FDI and the results suggest
the negative association, but not much significance. Suitable education applied for the work also helps
boost FDI in Lodz, which is presented in the report of Doroyska and Doroyski (2014).
This result can be explained by real-world experiences. Obviously, education is one of the most exact
factors influencing Human capital. With higher education, labors are more qualified, gain more
knowledge and can better allocate their resources as well as have better time management skills. This
increases productivity and encourages FDI. However, literacy is like a long-run investment which
only shows significant impacts when received proper attentions for a long period of time with a massive
number of people. In other words, literacy variable tends to have a more significant effect on FDI when
the host country aims to increase elementary education in the mass society.
Studies in Vietnam also generate the same result, but indicate that the impact of high-educated labors
does not have much statistical meaning. The report of Nguyen and Nguyen (2013) about FDI in Vietnam
provinces shows that foreign direct investors do not have a tendency to use Vietnamese high-educated
potential labor force, in fact, they are more likely to use primary labor force whose education level is
lower. This situation can be explained by other various factors, most obviously labor cost. Since
Vietnam attracts foreign investors by low wage rate rather than the skills of labor, literacy is not a
significant consideration.
2.1.3. Labor cost
Labor cost is often considered as one of the determinants of FDI. Yet in our opinion, labor cost, to some
extent, can be considered as one of the proxies in determining Human capital, since it reflects the level
of labors skills. However, it is minor and the fact that labor cost is affected by many other factors rather
than skills of human resources makes it insignificantly influence FDI when considering Human capital
as a variable. Nevertheless, for extended research and in order to make the report as detailed as possible,
we still present labor cost as one proxy of Human capital and to see whether it shows relationship
between Human capital and FDI destinations for foreign investors. All results from Khachoo and Khan
(2012), Ranjan and Agrawal (2011) and Bevan and Estrin (2000) are consistent and support this idea.
According to Ranjan and Agrawal (2011)s analysis, a 1% decrease in the host countries labor cost leads
to an increase of 0.49% in FDI inflows. However, findings from Nguyen and Bui (2014) suggest the
opposite correlation between the two variables, which means countries with high labor costs are more
likely to attract investment from foreign investors.
These differences can be explained as mentioned above. Since labor cost is highly influenced by other
factors, most studies suggest the negative relationship between labor cost and FDI. However, when
considering labor cost as one proxy to reflect Human capital, higher labor costs tend to reflect higher
labor skills, which encourages investor to invest since the goods are better-qualified, in turn leads to
promising profits.
Most reports hold the findings that labor cost has negative correlation with FDI, which means countries
with the availability of cheap labors are preferred FDI.
2.2. The effects of FDI on Human capital

Overall, throughout reports analyzed; it can be concluded that inward FDI often creates positive effects
on Human capitals factors in the host countries. But in some situations, the direction of the effect can
still be reversed.
According to Blomstrom and Kokko (2003), FDI has a considerable impact on the rise of formal
education in Thailand, Malaysia and some other countries owing to the shift in the demand for labor.
In addition, Gittens and Pilgrim (2013) prove that FDI leads to the accumulation of Human capital in the
host countries. Also agreeing on this conclusion, Nguyen et al. (2006) maintain that there is a connection
between the rise of FDI and the improvement of Human capital level in Vietnam in the period 1988 2003. Moreover, they also indicated that this relationship also has a positive impact on economic growth
at the statistical significant level of 5%.
Another idea was raised by Prez-Segura (2015) about the impact of FDI on HDI. An Empirical FixedEffect Model with data from 179 countries over the period from 1980 to 2011 was used. However, he
ended up with the conclusion that the magnitude of this effect is unclear and needs further explanations.
Finally, to mention about the effect of FDI on the host countries peoples health, Herzer and Nagel
(2012) informed about the complicated relationship between these two variables. By the 2SLS model,
they found out that FDI has a positive effect on health at low levels of income, but the effect decreases
with increasing income, then changes sign and becomes increasingly negative at higher levels.

Variabl Proxy
e

Sign of Author
the
(year)
effect

FDI

Formal
Education

FDI

Human
capital
Level

FDI

HDI

and
Governance

Title

Methodolo
gy

Sample

Main
results

Blomstro Human
Theoretical
m
and capital and Argument,
Kokko
Inward FDI Qualitative
(2003)
Analysis,
Empirical
Evidences
and
Observatio
ns.

Real statistics
from
Thailand and
Malaysia
(Source:
UNCTAD p.
274, 1994)

FDI has a
noticeably
positive
impact on
tertiary
education
in their host
countries.

Gittens
and
Pilgrim
(2013)

Foreign
Direct
Investment
and Human
capital:
A
Dynamic
Paradox for
Developing
Countries

Theoretical
Argument,
Panel Data
Analysis,
Empirical
Equation
and
Regression
Model.
(GMM,
OLS)

Worlds data
averaged over
five
year
periods, for
1970-2010

The
regression
coefficient
is positive
throughout
the
tests,
which
(Sources:
proves that
World
Development FDI leads
to
the
Indicators
2004
and accumulatio
2013 data set) n of Human
capital

Alejandr FDI
and
o Prez- Human
Segura
Developmen
(but
t: What is
small /
the Role of
unclear (2014Governance
)
2015)
?

Theoretical
Argument,
Empirical
Evidence,
Panel Least
Squares
Method
with FixedEffect
Model

An
unbalanced
panel of 158
countries
over the time
period
of
1996-2010.
The unit of
observation is
a country in a
given
fiveyear period.
The
5-year
periods are:
1996-2000,
2001-2005,
and
20062010.
(Sources:
UNDPs
International
Human
Development
Indicators,

It
is
highly
unlikely
that
FDI
has
an
economicall
y
significant
effect
on
improveme
nts in HDI.
Governance
does
not
appear to
have
a
synergistic
effect
on
human
developmen
t. However,
voice and
accountabili
ty is the

Table 2 The effects of FDI on Human capital

RESULT
Considered both sides, FDI has its own positive and negative impacts on the nations that received the
inflow cash. In fact, in this type of investment, both the investors and the receivers are benefit from the
micro and the macro point of view.
It is undoubted that the investors bring to the countries many merits, for instance technology, job
opportunities and chances to enhance knowledge as well as skills. The report also shows that an
increasing amount of health expenditure links to another increase in FDI inflow cash. Therefore, in some
ways, the living standards of the home countries are updated together with the social services such as
education, hospitalities and social welfares. Human capital has also been used properly and gets rid of
the status of being lack, which helps the economic growth gets better.
Plus, many researchers are concerned of the real motivations of the investors while investing in the
lower-developed nations due to the methods that they use to invest in those countries. Starting with a
question on the environment quality, they wander about the pollution and contamination trends which
comes from the technology that the investors bring to the home countries. Are they all new and friendly
to the environment? Do the equipment have the license that its technology will not harm the
environment and so forth? All that kind of questions are being asked by the citizens because they really
care about the future, not only the nearly profits such as new updates on transportation and education.
In what way the FDI effects on the host countries, the citizens of which who are receiving the benefits
also putting up the negative consequences such as the low income or the danger in health quality. This
problem must be looked through harder by both the government as well as the insight of their citizens
before the consequences become too serious.

FUTURE WORK
The report demonstrates that human capital and foreign direct investment have a close bond and both of
which have played a significant role in the economic growth. Furthermore, this relationship has twosided effects on both the investors and the host countries.
From the micro point of view, the purpose of foreign direct investment is to seek for the places which
could provide the factors with higher profits for the investors and together enhance and fulfill the lack of
capital for the host countries. Although many people have seen it as a very positive view, others have
not. From the differences of this predicament, our group decides to to more researches on the truth
behind FDI from the outlook of the investors and the recipients.
One of the most rising problem at the moment is about labor exploitation, which comes from the cheap
labor in the less developed countries (LDCs) and another one is environment protection. Do the
employees in the workforce which have been invested from FDI have the salary that they are worth
receiving? Do the investing companies have the words that they claimed as in the contracts? Here in are
just some of the points that we might have to take a closer look at.
From the macro point of view, it is unclear that FDI really helps the host countries to get better at all due
to the way they affect to them. Even the host countries are not sure about the real value that they receive
from the investors or it just makes their debts become increasingly enormous. Despite the fact that the
investors bring new cultures as well as technologies, it is under question that the truly value belongs to
whom.

CONCLUSION
All in all, FDI has played an influencing part in the host countries, and in what way they affects is
positive or not is under question. It cannot be denied that the investors have brought many
breakthroughs for the LCDs while they could also benefits themselves from which.
For the host countries, they have a number of advantages from FDI. For instance, the workforce
productivity as well as the innovative activities has been surged, especially in some areas such as
literacy and formal education have incredible breakthroughs. The increase proportion of FDI leads to a
considerable percentage of income rising. Furthermore, many LCDs have been transferred from the host
countries with modern technologies and equipment which they would spend lots of money to buy and
own if it has not been for FDI.
Besides, the environment pollution and exploitation in the human capital are the two concerns that
bother the government and the citizens of the host countries. Recently, many cases in the industry have
shown that many companies have broken the law, poisoning the water sources as well as the beaches
nearby, which kills millions of sea animals and plants. Furthermore, the question about the insurance of
the workers in the hard industry has influenced and has been the subject for many researchers to argue
on.

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