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Foreign Direct Investment and Education Investment in Developing Countries

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  • Iwai, Nobuyuki
  • Thompson, Stanley R.
  • Banerjee, Priyodorshi
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    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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    Bibliographic Info

    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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    Web page: http://www.iatpc.ifas.ufl.edu/
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    Keywords: International Relations/Trade; Labor and Human Capital;

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    1. Glass, Amy Jocelyn & Saggi, Kamal, 1999. "Multinational firms and technology transfer," Policy Research Working Paper Series 2067, The World Bank.
    2. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-26, October.
    3. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    5. Gary S. Becker & Kevin M. Murphy & Robert Tamura, 1994. "Human Capital, Fertility, and Economic Growth," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 323-350 National Bureau of Economic Research, Inc.
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    7. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
    8. 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.
    9. Glass, Amy Jocelyn & Saggi, Kamal, 1999. "FDI policies under shared factor markets," Journal of International Economics, Elsevier, vol. 49(2), pages 309-332, December.
    10. 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(2), pages 207-296.
    11. Ethier, Wilfred J, 1985. "International Trade and Labor Migration," American Economic Review, American Economic Association, vol. 75(4), pages 691-707, September.
    12. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
    13. "Fukao, Kyoji" & "Amano, Tomofumi", 1998. "Direct Investment Abroad and the “Hollowing Out” of Manufacturing Industry," Economic Review, Hitotsubashi University, vol. 49(3), pages 259-276, July.
    14. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
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