Foreign Direct Investment and Labor Quality in Developing Countries

Authors

  • Nobuyuki Iwai,

    1. International Agricultural Trade and Policy Center, Food and Resource Economics Department, University of Florida, G085 McCarty Hall B, Gainesville, FL 32611, USA
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  • Stanley R. Thompson

    Corresponding author
    1. Department of Agricultural, Environmental and Development Economics, Ohio State University, 335 Agricultural Administration Building, 2120 Fyffe Road, Columbus, OH 43210, USA
      Iwai: International Agricultural Trade and Policy Center, Food and Resource Economics Department, University of Florida, G085 McCarty Hall B, Gainesville, FL 32611, USA. Tel: +1-352-392-1881 (ext. 211); E-mail: niwai@ufl.edu. Thompson: Department of Agricultural, Environmental and Development Economics, Ohio State University, 335 Agricultural Administration Building, 2120 Fyffe Road, Columbus, OH 43210, USA. Tel: +1-614-292-6225; E-mail: thompson51@osu.edu.
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  • The authors wish to thank Priyodorshi Banerjee, Don Larson, Ian Sheldon, Kiyoshi Matsubara, and Katie Bovitz for their helpful comments. They also thank all seminar participants at University of Florida and Ohio State University, but especially, Robert Emerson, Takao Yurugi, and Naoya Kaneko for their insightful comments.

Iwai: International Agricultural Trade and Policy Center, Food and Resource Economics Department, University of Florida, G085 McCarty Hall B, Gainesville, FL 32611, USA. Tel: +1-352-392-1881 (ext. 211); E-mail: niwai@ufl.edu. Thompson: Department of Agricultural, Environmental and Development Economics, Ohio State University, 335 Agricultural Administration Building, 2120 Fyffe Road, Columbus, OH 43210, USA. Tel: +1-614-292-6225; E-mail: thompson51@osu.edu.

Abstract

The quality of local labor is an important factor in a multinational corporation's (MNC) decision to set up production operations in a developing country. It is often observed that developing country governments attempt to attract MNCs by enhancing labor quality. This paper studies the interaction between an MNC and a local government which has superior information on local labor quality. The local government has an incentive to enhance the labor quality and share that information with the MNC because it increases both its net tax revenue and profit of the MNC. The paper provides an explanation for recent findings of FDI in developing countries: the bulk of FDI has been directed toward a limited number of countries and human capital plays an increasingly important role in attracting FDI.

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