Foreign Direct Investment and International Skill Inequality

Abstract

This paper focuses on the effects of foreign direct investment (FDI) on skill inequality amongst countries. New growth models and international business studies predict that when countries liberalize their trade and investment regime in an environment of imperfect technology transfers, they will specialize in activities depending on the initial conditions such as skill endowments. Countries with few skills tend to specialize in low-skill intensive production, while countries with a high innovation rate and skill endowment tend to specialize in the production of high-skill intensive goods. The econometric evidence, based on an unbalanced panel for 111 countries over seven 5-year time periods from 1970 to 2000, confirms that FDI enhances skill development (particularly secondary and tertiary enrolment) in countries that are relatively well endowed with skills to start with. There are important policy conclusions for national governments when FDI tends to raise international skill inequalities. In particular, developing countries with low-skill endowments that attract investors would do well to co-ordinate actively their human resources policies with investor needs in order to bring the country to a higher skill path.

Beyond Capital: Monitoring Development Outcomes of Multinational Enterprises

“…Evidence over a large number of years shows that FDI amplifies differences in initial skill endowments between countries: in those that are relatively well-endowed with skills, FDI enhances skill development by increasing enrollment in secondary and tertiary education relative to the sample average. However, in countries that are relatively poorly endowed with skills, FDI is more intensively directed towards low-skilled activities, creating a low-skill equilibrium or trap (Te Velde and Xenogiani, 2007).…”

FDI, Productivity and Financial Development

“…For example, Intel in Costa Rica and Shell-BP in Nigeria have made contributions to local universities; in Singapore, the Economic Development Board has collaborated with MNEs to establish and improve training centres. 10 However, in an empirical analysis of a panel of countries, te Velde and Xenogiani (2007) find that FDI enhances skill development (particularly secondary and tertiary enrolment) only in countries that are relatively well endowed with skills to start with.…”

Regional Integration and Poverty: A Review of the Transmission Channels and the Evidence

“…Velde et al . () look at the issue of whether foreign owned firms invest more in skill upgrading and trainings and find that FDI enhances skill development only in countries that are already relatively well endowed with skills. This finding illustrates again the importance of complementary policies.…”