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Links between foreign direct investment and human capital formation: Evidence from the manufacturing sector in India

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  • Gunja Baranwal

Abstract

This paper is related to the literature on the effect of foreign direct investment (FDI) on the labour market of host countries. Labour market literature has focused on the demand side of FDI; that is, increasing wage inequality by demanding more skilled workers or just increasing the overall average wages. On the supply side, FDI can enrich the skilled labour force of the host country by the provision of on-the-job training or learning or through indirect technological spillover effects. This paper takes into account both these effects and tests for human capital formation effect of FDI in India for core manufacturing sector firms for the period 2001–2015 using the Prowess database of the Centre for Monitoring Indian Economy. It also takes into account the endogeneity of decision-making on the part of foreign firms in locating FDI. Different dynamic panel data methods are used with static and dynamic generalized method of moments techniques. This study does not find any positive supply-side human capital formation effects of FDI but finds a positive demand-side effect of FDI of raising wage inequality and average wages. The results remain robust while taking into account heterogeneities at region, industry, size, and age of the firms.

Suggested Citation

  • Gunja Baranwal, 2019. "Links between foreign direct investment and human capital formation: Evidence from the manufacturing sector in India," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 28(2), pages 137-160, February.
    • Handle: RePEc:taf:jitecd:v:28:y:2019:i:2:p:137-160
    DOI: 10.1080/09638199.2018.1508304
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    Cited by:

    1. Raihan, Selim, 2022. "What Does Data on Functional Income Distribution tell us about Trends in and Correlates of Income Inequality in The Asia-Pacific?," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(3), pages 45-64.
    2. Jurgita Bruneckiene & Robertas Jucevicius & Ineta Zykiene & Jonas Rapsikevicius & Mantas Lukauskas, 2019. "Assessment of Investment Attractiveness in European Countries by Artificial Neural Networks: What Competences are Needed to Make a Decision on Collective Well-Being?," Sustainability, MDPI, vol. 11(24), pages 1-23, December.
    3. Pooja Sharma & Sunita Gupta & Devika Kapoor, 2024. "Potential for foreign direct investment and its role in foreign direct inflows," International Economics and Economic Policy, Springer, vol. 21(4), pages 985-1000, October.

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