Association for Public Policy Analysis & Management

Foreign Direct Investment (FDI) is widely believed to play a key role in countries’ development strategies. Existing research suggests that FDI may be positively related to technology transfer, industrial productivity, and overall economic growth. As such, developing countries have undertaken significant policy reforms to attract FDI. As a consequence, vast amounts of FDI have flowed into developing countries in recent decades. However, questions remain as to the effectiveness of FDI at improving outcomes in education, health and standards of living. In this paper, I hypothesize that FDI inflows drive the demand for skilled labor in host countries, which may in turn increase investments in human capital. Unlike primary and secondary education – which are compulsory across most developing countries – tertiary education is voluntary and can better capture responses to these individual incentives to invest in human capital. Specifically, I expect a country’s enrollments in tertiary education, the primary outcome of interest in this study, to be influenced by FDI inflows and policy factors, as well as economic, political and demographic characteristics.

I contribute to the literature on FDI and human capital by analyzing, for now, the most recent data on FDI inflows and tertiary education enrollments in the time period 2001-2015. Since the relationship between FDI and human capital is endogenous, I conduct an instrumental analysis, using the count of a country's Bilateral Investment Treaties to instrument for FDI.