Low wages or skilled labour? Prospects for foreign direct investment in developing countries

Most developing countries consider foreign direct investment (FDI) as an invaluable source for filling the resource gaps that hinder their development programmes. Moreover, FDI can also be a medium for acquiring skills, technology, organizational and managerial practices and access to markets. However, although total FDI inflows have spiralled in recent years, the bulk of the inflows has been directed to only a limited number of countries. This raises the issue of whether it is possible to identify a set of government policies that might enhance the attractiveness of developing countries as locations for FDI. The first part of the paper analyses the evolution in the structural characteristics of FDI and discusses the changing needs of transnational corporations (TNCs). The empirical section of the paper investigates the relevance of human capital in attracting FDI to developing countries. The empirical findings are: (i) human capital is a statistically significant determinant of FDI inflows; (ii) human capital is one of the most important determinants; and (iii) its importance has become increasingly greater through time. This has wide-ranging policy implications.