The effect of foreign direct investment on human capital development in East Asia

ABSTRACT

East Asia has experienced fast economic growth along with large inflows of foreign direct investment (FDI) and accumulated human capital since the 1960s. Economic literature suggests a link between FDI and human capital development via technology transfer. This study employs a panel of sample data from 16 East Asian countries from 1985 to 2010 to examine the effect of inward FDI on human capital accumulation. The results show that an increase in foreign presence is associated with an increase in secondary schooling, yet has a negative impact on tertiary schooling. FDI from OECD countries presents positive effects on both secondary and tertiary schooling in East Asian countries. The findings are robust to different measures of educational attainment and different specifications.

KEYWORDS:

• Foreign direct investment
• human capital
• education
• East Asia

JEL classification:

• F1
• I2

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Based on the World Bank Report (1993), the East Asian Miracle refers to eight economies in East Asia, including Japan, South Korea, Taiwan, Singapore, Hong Kong, Indonesia, Malaysia and Thailand. Furthermore, the eight economies are referred to high-performing Asian economies (HPAEs).

2. GNP per capita is not available in the World Bank. The growth rate of GNI per capita is computed as a substitute to measure economic growth.

3. The F-statistics of the first-stage estimation is 56.07 with a p-value of 0.0000. This statistic rejects the null hypothesis that all coefficients equal zero, indicating that the instruments are relevant. Furthermore, in the Durbin–Wu–Hausman test, the coefficient of residuals from the first-stage estimation is significantly different from zero at the 10% level, indicating that FDI is endogenous and the fixed-effects estimates are not consistent.

4. The p-value of the Durbin–Hausman–Wu F-test is reported in the bottom of Table 6.

Additional information

Notes on contributors

Hong Zhuang

Hong Zhuang is an Associate Professor of Economics in Judd Leighton School of Business and Economics at Indiana University South Bend. She has published in Bulletin of Economic Research, Eastern European Economics and Economics Bulletin. Her research interests include international economics and development economics.