Multinational firms and human capital investment: A dynamic knowledge-capital model

To capture the mixed picture of trade-induced human capital investment in both developing and developed countries, this paper develops a dynamic general equilibrium model with multinational enterprises (MNEs) and endogenous education investment decision and investigates the impacts of trade cost reduction on human capital accumulation and wage inequality. Illustrated with a numerical example, we show that with endogenous endowment structure, the set of active firm types is mutually determined by trade cost and the discrepancy in the incentives for education attainment between countries. In addition, the exact impacts of trade are determined by changes in the production patterns of firms. When the reduction in trade cost expands the scale of vertical MNEs with headquarters in developed countries, education investment increases in both developing and developed countries. We also show that the distributional impacts of production offshoring are mitigated by human capital accumulation. The conclusions in this paper highlight the importance of education policies in complementing trade policies, as well as the important role of MNEs in shaping the world income and endowments distribution.