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Foreign Direct Investment and Education Investment in Developing Countries

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Author Info
Iwai, Nobuyuki
Thompson, Stanley R.
Banerjee, Priyodorshi
Abstract

We introduce a model to explain the economic rationale for the observed policy combination of a developing country (hosting foreign direct investment (FDI) through education investment (EDI)) and the interest of a multinational corporation (MNC) in the local labor quality when it contemplates FDI. Information on local labor is the source of a more efficient contract for the MNC with local labor, and the local government can benefit both agents through EDI, FDI, and information sharing. This strategy set is likely to be used by a country in the early stage of economic development. The education level chosen by the local government, however, will be higher than that which maximizes the welfare of local labor. In that sense, the government has the incentive to benefit itself and the MNC at the expense of local labor.

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Paper provided by University of Florida, International Agricultural Trade and Policy Center in its series Working Papers with number 15643.

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Date of creation: 2004
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Handle: RePEc:ags:uflowp:15643

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Keywords: International Relations/Trade; Labor and Human Capital;

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  5. David E. Bloom & Jeffrey D. Sachs, 1998. "Geography, Demography, and Economic Growth in Africa," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-2), pages 207-296. [Downloadable!]
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  8. Gary S. Becker & Kevin M. Murphy & Robert F. Tamura, 1990. "Human Capital, Fertility, and Economic Growth," NBER Working Papers 3414, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August. [Downloadable!] (restricted)
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  12. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn. [Downloadable!] (restricted)
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  13. Horstmann, Ignatius J & Markusen, James R, 1996. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 1-19, February.
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