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Working Paper No. 07-10

Accounting for Quality Differences in Human Capital and Foreign Direct Investment
Namsuk Choi
November 2007


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.

JEL classification: F21, F23, J24, O15
Keywords: labor skills, international test scores, horizontal FDI, vertical FDI