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Does FDI Promote Human Capital Accumulation? The Role of Gradual Financial Liberalization

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  • Qichun He

    (CEMA, Central University of Finance and Economics)

Abstract

We argue that how inward foreign direct investment (FDI) affects domestic human capital accumulation (HCA) depends on the degree of financial deregulation. Utilizing the Chinese experience and its panel data, the OLS (ordinary least squares) regressions suggest that FDI has a significant positive interaction effect with financial deregulation on HCA. Specifically, the estimated coeffcient on FDI is positive but insignificant, while that on its interaction with financial deregulation is significantly positive. It means that FDI promotes HCA in China, and higher degree of financial deregulation reinforces the promoting effect. Instrumenting FDI with two sets of instruments grounded on different rationales (which ensures valid identification), our limited-information maximum likelihood (LIML) estimation results are similar to those of OLS. The results are also robust when we control for other factors affecting HCA, and time and province effects.

Suggested Citation

  • Qichun He, 2011. "Does FDI Promote Human Capital Accumulation? The Role of Gradual Financial Liberalization," CEMA Working Papers 455, China Economics and Management Academy, Central University of Finance and Economics.
    • Handle: RePEc:cuf:wpaper:455
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    More about this item

    Keywords

    Foreign Direction Investment; Human Capital; Gradual Financial Deregulation; Interaction; Panel Data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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