Does Inward Foreign Direct Investment Contribute to Skill Upgrading in Developing Countries

Abstract

How do multinational firms affect both the demand for and supply of skills in host-country labor markets? On the demand side, inward can FDI stimulate demand for more-skilled workers in host countries through several channels. To Date, most empirical evidence indicates that these channels work mainly within multinationals themselves, rather than through knowledge spillovers to domestic firms. On the supply side, the question of how inward FDI influences the development of human capital is much less clear, with possible links at both the micro- and macro-levels. This paper offers some new empirical evidence on the links between inward FDI and within-industry skill upgrading for a country-industry-year panel spanning both developed and developing countries. The main empirical finding is a robustly positive correlation between skill upgrading and the presence of affiliates of U.S. multinationals, with this correlation even stronger among the sub-sample of developing countries. This correlation is consistent with inward FDI stimulating skill upgrading in these developing countries.

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