WHAT IS Education affects FDI

Education increases labor productivity, encourages the development of modern technology, enhances a nation's ability to innovate, helps individuals become better citizens, and supports the spread of knowledge in business. These factors imply that the quality of human capital is an important factor in attracting foreign direct investment. Miningou and Tapsoba (2017) use data from nearly 90 countries from 1990 to 2010 and apply a stochastic frontier model to construct a labor wage frontier that approximates the highest labor wage that countries can achieve across different average years of education. Their findings suggest that there is a positive relationship between the external efficiency of the education system and FDI. The study showed that net FDI inflows per unit of employment increased by 18% as the standard deviation of the efficiency score increased. Thus, their study demonstrates that while the academic year alone has no effect on FDI inflows, the external efficiency of the education system does have a positive effect on FDI. In another recent paper, Kheng, Sun, and Anwar (2017) used country-level panel data for 55 developing countries from 1980 to 2011, using an analysis based on fixed-effects simultaneous equation estimates. Their results reveal a significant bidirectional causal relationship between human capital and foreign direct investment. They concluded that increased spending on education and training is needed to improve human capital development and make the FDI-led economic growth model more applicable to all developing countries. It is well known that the production of skilled labor that meets labor market needs should be an important outcome of any education system in order for the system to be valuable in building human capital that attracts foreign direct investment. The fact that FDI is mostly nowadays geared to knowledge and skill-intensive industries indicates that countries with higher levels of human capital are more attractive to foreign investors In addition, the literature review also suggests that implicitly, the education level of the labor force will provide the workers with a broad knowledge that is also valuable for attracting FDI. This is consistent with a report by UNCTAD (2018) that indicated that the concentration of international investments has shifted from the availability of rich natural resources to technology-centered services and industries over the past two decades. This made education a very important factor in attracting FDI. Formal education may improve entrepreneurial skills such as recognizing business opportunities, understanding markets, and managing large sets of resources. This may make entrepreneurship an attractive labor market option to individuals with high education. Moreover, due to the spatial concentration of knowledge spillovers and the importance of agglomeration benefits, firms often tend to cluster in regions with high numbers of highly educated individuals (Parker 2009, p. 149). Indeed, several empirical studies find a positive relationship between education measured at the regional level and the region’s rate of entrepreneurship (Armington and Acs 2002; Lee et al. 2004; Bosma and Schutjens 2011). An exception is formed by Reynolds et al. (1994) who, in their study of five European countries and the USA, only found a positive link between regional education levels and new firm formation rates for Italy.