Working Paper No. 07-10

Accounting for Quality Differences in Human Capital and Foreign Direct Investment

Namsuk Choi

November 2007

ABSTRACT

In this paper, I empirically investigate how cross-country differences in the quality of human capital,
as they are captured by the conventional measures of international test score differences, influence
the patterns of foreign direct investment. Using panel data covering 32 countries and the period
between 1985 and 2004, I find that a host country’s quality of educational attainment plays an
independent role in attracting foreign direct investment. In particular, I find empirical evidence in
support of the idea that the quality of human capital influences horizontal foreign direct investment
even after accounting for the roles of skill and factor endowments, trade costs, investment costs and
country-size and income effects.

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