Is human capital relevant in attracting innovative foreign direct investment to China?

Abstract

The impact of human capital on foreign direct investment has been assessed in an essentially descriptive manner. Most quantitative studies focus on the macroeconomic level. Microeconomic studies are scarce internationally and even more so in the case of China. Based on a survey of innovative firms located in China, this study assesses the importance of human capital in attracting foreign direct investment (FDI) to China. Using a sample of 77 innovative firms, and logistic estimation techniques, we concluded that even though human capital does not constitute a direct factor in attracting FDI to China, it is a positive indirect factor through firms' R&D efforts. Moreover, we found that connections with universities have a positive impact on the attraction of FDI, although the impact of human capital on the attraction of FDI is not sustained on the basis of additional contacts with universities. Evidence gathered suggests that it is important that public authorities recognize the interconnections between education and innovation policies and the implementation of FDI policies – human capital is only capable of attracting innovative foreign capital when associated with high levels of R&D.

Keywords:

• foreign direct investment (FDI)
• human capital
• research and development (R&D)
• innovation
• China

Acknowledgements

The authors sincerely acknowledge the valuable comments and suggestions of the referees. The usual disclaimer applies.

Notes

Data from ‘Rising FDI into China: The Facts Behind the Numbers’, UNCTAD investment brief no. 2, 2007. Available at http://www.unctad.org/en/docs/iteiiamisc20075_en.pdf.

Only studies published in scientific journals and written in English were surveyed – non-published or studies written in Chinese were not screened.

Data from the ‘Report on the Reinforcement of Authorization Management, Record, Currency and Tax in Foreign Capital Firms’. Available at http://tfs.mofcom.gov.cn/aarticle/zcfb/200301/20030100062554.html (in Chinese).

In this study, firms were queried on the medium values of the relevant variables over the last three years (2005–2007).