Does FDI Promote Human Capital Accumulation? The Role of Gradual Financial Liberalization

Qichun He
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Qichun He: CEMA, Central University of Finance and Economics

No 455, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: We argue that how inward foreign direct investment (FDI) affects domestic human capital accumulation (HCA) depends on the degree of financial deregulation. Utilizing the Chinese experience and its panel data, the OLS (ordinary least squares) regressions suggest that FDI has a significant positive interaction effect with financial deregulation on HCA. Specifically, the estimated coeffcient on FDI is positive but insignificant, while that on its interaction with financial deregulation is significantly positive. It means that FDI promotes HCA in China, and higher degree of financial deregulation reinforces the promoting effect. Instrumenting FDI with two sets of instruments grounded on different rationales (which ensures valid identification), our limited-information maximum likelihood (LIML) estimation results are similar to those of OLS. The results are also robust when we control for other factors affecting HCA, and time and province effects.

Keywords: Foreign Direction Investment; Human Capital; Gradual Financial Deregulation; Interaction; Panel Data (search for similar items in EconPapers)
JEL-codes: C23 F21 J24 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2011-06
New Economics Papers: this item is included in nep-hrm and nep-tra
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