Talent vs. Hard Work: On the Heterogeneous Role of Human Capital in FDI Across EU Member States

Lubica Stiblarova and Anna Tykhonenko
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Lubica Stiblarova: Faculty of Economics, Technical University of Kosice, Slovak Republic
Anna Tykhonenko: Université Côte d'Azur, CNRS, GREDEG, France

No 2025-11, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: his paper explores the intricate relationship between human capital and foreign direct investment (FDI) across 28 European countries from 2003 to 2022. To address this relationship's complex and often ambiguous nature, a Bayesian shrinkage estimator is utilized to capture significant heterogeneity across different regions. The results indicate that the discouraging role of human capital in FDI is most pronounced in the "Eastern bloc," where cost-effectiveness serves as the primary driver of investment. In contrast, efficiency-seeking motives prevail in Western Europe, where higher levels of human capital contribute to increased FDI. Sectoral analysis further reveals that the critical transition for attracting FDI occurs not between the secondary and tertiary sectors, as traditionally believed, but between the tertiary and quaternary sectors. In these advanced sectors, quaternary FDI leverages innovation potential through high-skilled labor, underscoring the critical importance of human capital. These findings highlight the nuanced and region-specific dynamics of FDI, emphasizing the need for tailored policies to maximize the benefits of human capital in attracting foreign investment.

Keywords: Human capital; foreign direct investment; regional heterogeneity; multi-speed Europe; Bayesian shrinkage estimator (search for similar items in EconPapers)
JEL-codes: C11 F21 I25 O14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2025-04
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