Foreign Direct Investment and Foreign-Educated Labor

Foreign Direct Investment and Foreign-Educated Labor

The relationship between foreign direct investment (FDI) and foreign-educated labor in an FDI host country is investigated. Workers who are educated abroad acquire country-specific human capital (e.g., language capital and country-specific knowledge on firm organization and on social system) that makes labor more productive in the host country of study than in other countries. A foreign subsidiary that shares the technology of a parent firm can utilize foreign-educated labor more productively due to the country-specific human capital. Our theory shows that increasing foreign-educated labor in an FDI host country attracts more FDI from the country of foreign study, provided that human capital and physical capital are complementary in production. We test this and other implications against bilateral FDI and foreign-student data for 63 developed and developing countries over the period of 1963-1998. Our empirical findings strongly support our predictions and show that foreign-educated labor accounts for a sizable portion of growth in FDI flows during the sample period.