Does human capital development matter in FDI location decisions? A case of Austria.

Abstract

This paper investigates the relationship between human capital development and foreign direct investment (FDI). In particular, the direction of causality between these two variables is the main focus of this study. This study has been necessitated by the failure by many previous researchers to concur on the causal relationship between FDI and human capital development. Some authors argue that there is a uni-directional causality relationship running from FDI to human capital development whilst others are saying the causality runs the other way round from human capital development to FDI. The other group of authors says there is a bi-directional relationship between these two variables whilst the fourth and last group of authors maintains that there exist no causal relation at all between FDI and human capital development. Using the lagged error correction model (ECM), the study observed that FDI measured by FDI, net inflows (% of GDP) was Granger caused by human capital development (proxied by pupil-teacher ratio) both in the short and long run. However, the null hypothesis which says that FDI Granger caused human capital development was rejected both in the short and long run. The author therefore recommends the intensification of teacher-pupil ratio improvement programmes in order not only to increase FDI inflow but to ensure Austria benefits from that increased FDI inflow.