A cross-country analysis of the relationship between human capital and foreign direct investment

Abstract

PurposeThe Zhang–Markusen (Z-M) inverse U-shape theory uses education as a human capital variable to investigate the impact of educational attainment on foreign direct investment (FDI) inflows to a country. The objective of this research is to empirically test this theory in a cross-country framework.Design/methodology/approachFixed effect panel regression has been used to test the Z-M hypothesis for 172 countries for the period 1990–2015. For the purpose of this study, countries were divided into four groups as per the World Bank classification: Low-income economies, lower middle-income countries, upper middle-income economies and high-income economies.FindingsThe findings of this study reinforce the proposition that macroeconomic factors are the major determinants of FDI inflows into various countries. The authors find that the size of the market measured by gross domestic product (GDP), the growth potential of the market measured by real GDP growth rate and the availability of infrastructure are the major factors that enhance the attractiveness of a country as an FDI destination.Originality/valueThough the Z-M theory has been empirically tested in cross-country frameworks, no consensus has been reached. Thus, it is interesting to look again at the validity of the Z-M hypothesis using data covering longer and more recent periods. The study includes both macroeconomic and human capital determinants of FDI, so as to arrive at a comprehensive model explaining the FDI flows into various countries.

Determinants of foreign direct investment in Malaysia

“…The next research finding also supports the proposition that high-quality human capital entices FDI. Sethi et al (2022) conducted a cross-country analysis to explore the relationship between human capital and FDI in 172 countries between 1990 and 2015. The researchers utilized a fixedeffect panel regression in their study and concluded that higher primary education enrolment contributes to higher FDI flows into high-income nations, while higher secondary education enrolment has a significant and positive impact on FDI inflows to low-income countries.…”