Challenges in the Era of Globalization - iaabd

Proceedings of the 12th Annual Conference © 2011 IAABD
relationship are Dunning (1988), Lucas (1990) and Zhang and Markusen (1999). There are, however, very
few studies done to verify this empirically for developing countries, and virtually none specifically for
SSA. The main problem encountered with most of these studies is the difficulty in defining good and
consistent explanatory variables for human capital.
Studies using data for the period 1960s and 1970s show no significant influence of human capital on the
inflow of FDI, regardless of the definition or measure of human capital. These include studies by Root
and Ahmed (1975), one of the few studies that consider human capital as a determinant of FDI in
developing countries, find that none of the proxies for human capital and labour skills is a significant
predictor of FDI inflows for 58 developing countries. Another study with a statistically insignificant
human capital explanatory variable of FDI stock is that of Narula (1996), who used a sample of 22
developing countries and the proportion of tertiary education per population as a proxy for human capital.
Similarly Hanson (1996), using a sample of 105 developing countries, shows that the adult literacy rate
was not a significant determinant of FDI stock compared with other socio-economic variables, such as
political stability and security of property rights. As a result of these studies, Dunning (2002) and Richie
(2002) conclude that FDI inflows of this period were concentrated in natural resource and market seeking
types, whose main determinants were availability and abundance of natural resources and cheap labour.
Human capital was not a significant factor for these types of FDI flows and it plays an increasingly
important role as countries progress along their development paths.
These conclusions are quite different from cross-country analyses based on data covering the period
1980s and 1990s. Nunnenkamp and Spatz (2002) and UNCTAD (2002) both find a positive and
significant relationship between FDI inflows and various measures of human capital. Noorbakhsh et al
(2001), in addition, show that its positive statistical significance becomes even more significant over time.
The reason for this trend is that FDI inflows to LDCs tend to be changing to more efficiency seeking
types, requiring higher levels of skilled labour, even in natural resources, where a greater proportion of
processing activities are done in the host countries, requiring higher levels of labour skills (e.g. see Lewin
2009).
Most of these later studies used various types of measures as proxies for human capital. UNCTAD (2002)
use tertiary gross enrolment ratio, and science and engineering student ratio. Nunnenkamp and Spatz
(2002) proxy human capital with Borro and Lee’s (2000) average years of education of total population
aged 15 and above. On his own, Barro (1991) uses levels of school enrolment to demonstrate a positive
correlation between human capital and growth. Other proxies used to measure human capital include; the
adult literacy/illiteracy rate, the share of national education expenditure, etc. Secondary school level of
education seemed to be the absolute minimum necessary to stimulate efficiency seeking FDI. The
question then remains as to which level of education or type of education has the most significant effects
on the inflow of FDI. In this study, we use alternative measures to proxy for human capital, alongside
other explanatory (or control) variables, to identify the most appropriate proxy for human capital in SSA.
This paper, resulting from these changing requirements, has classified these factors that influence FDI,
particularly in less developed countries (LDCs), into two groups; the traditional factors and the nontraditional
factors. Among the traditional factors, we have those that are more significant in explaining the
flow pattern of market-seeking and natural resource-seeking FDI. These include market size and growth,
availability and cost of exploiting natural resources, availability and cost of labour force, exchange rate
and inflation rate. These factors reflect the home-host, push-pull characteristics of foreign activity.
Among the non-traditional factors, we have the level and development of innovation, communication and
technology (ICT), human capital development, macroeconomic stability, socio-political stability,
corruption and infrastructural development.
278