On the effects of foreign direct investment on local human capital formation

This paper looks at both the theoretical and econometric support to the notion of optimal FDI levels. It does so by uncovering an inverted-U-shaped relationship between FDI and educational effort. The optimality of a particular FDI inflow depends on the educational incentives induced by FDI on the local, heterogeneous population. Those incentives are formed in the face of uncertainty and asymmetric information between the multinationals and their potential workers. Our estimates confirm the significance of a positive (linear) and a negative (non-linear) impact of FDI per capita on tertiary schooling, both in developed and developing countries. (C) 2011 Asociacion Cuadernos de Economia. Published by Elsevier Espana, S.L. All rights reserved.