The Effects of Foreign Direct Investment on Human Development

Global Economy JournalVolume 4, Issue 2 2004 Article 9

The Effects of Foreign Direct Investment onHuman Development

Basu Sharma∗ Azmat Gani†

∗Professor of Industrial Relations and Human Resources Management, University of NewBrunswick, [email protected]†Lecturer in Economics, The University of the South Pacific, Suva, Fiji, gani [email protected]

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The Effects of Foreign Direct Investment onHuman Development

Basu Sharma and Azmat Gani

Abstract

Various studies in the past have examined the effect of foreign direct investment on economicgrowth of both developed and developing countries. However, research on the influence of foreigndirect investment on an expanded conception of socio-economic progress such as human devel-opment is absent. In this article, we examine the effect of foreign direct investment on humandevelopment (measured by the human development index) for middle and low-income countriesfor the period from 1975 to 1999 to fill in this lacuna. Regression results of a fixed effects modelindicate a positive effect of foreign direct investment on human development for both the groupsof countries.

KEYWORDS: human development, foreign direct investment, multinational corporations, globalwelfare



INTRODUCTION

Mainstream economists and modernizations theorists generally assume that human development automatically follows from economic growth. However, this assumption has recently been questioned (Fine 1999; UNDP, 1999; Pieterse, 1999), and there has been a wide-spread recognition of the human development index (HDI), developed by the UNDP, as a proximate and more appropriate indicator of economic and societal progress of nations (see for example, Streeten, 1999; Ranis, 2000). Given this shift in the conceptualization as well as measure of development, one important question then arises namely, whether some of the key traditional determinants of economic growth such as foreign direct investment (FDI) by transnational corporations (TNCs) also significantly influence this broadly defined measure of human development. This is an important question, but has rarely been addressed in the literature. Our purpose in this paper is to investigate this question by examining the effect of FDI on HDI.

TNCs are one of the key sources of resource transfer across developed and developing countries. FDI is their main vehicle in doing so. Since capital, technology and management know-how are bundled into one in FDI, its consequences for economic growth and the welfare of host countries are likely to be significant. Several studies in the past have examined this issue with specific focus on the growth effect, and a majority of them have found that FDI has a positive effect on the economic growth of developed as well as developing countries (Papanek, 1973; Stoneman, 1975; Rothgeb, 1984; Sharma, 1986; Doraisami and Leng, 1995, Dixon and Boswell, 1996; and United Nations, 1996).

However, the ultimate objective of economic development is to improve human development. Yet economic growth has not been accompanied by improvements in human conditions everywhere. Consequently, the debate about economic development has taken on a new turn in recent years. Traditionally, per capita gross national product (GNP) is the measure of a country’s development performance. It is but a one-dimensional measure of development, which is a multi-faceted phenomenon. While acknowledging this as a uni-dimensional measure of economic development, some economists still strongly argue that this measure does not seriously distort the level of development (see Krugman, 1996). On the other hand, Sen (1998) notes that a country’s level of development depends on various social and physical conditions, for example, the availability of health care, orderliness of living and access to modern medical knowledge. Hence, GNP per capita is too narrow a measure and development should be understood in a broader sense.

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Sharma and Gani: Foreign direct investment and human development



In view of this shift in focus, we consider the human development index to be a more important gauge of a country’s development. And it is urgent to examine the effects of FDI on human development the same way as has been done in the past with respect to economic growth. Moreover, human development has recently been advanced as an issue of academic discussion. In particular, the connection between human development and economic growth is an area that is strongly explored both theoretically and empirically. Of notable distinction for their recent contributions in this area are Anand and Sen (2000) who focus on human development and economic sustainability and Ranis, Stewart and Ramirez (2000) who investigate the connections between economic growth and human development. While such discussions are gaining strength, we consider our study to contribute and complement the current literature on human development and transnational corporations.

The paper is organized into six sections. The next section presents some stylized facts on FDI. Section three presents the hypotheses about the relationship between human development and FDI together with other relevant socio-political and economic variables. Section four describes data sources and samples characteristics, while section five presents the empirical results. The paper concludes with a discussion of implications of our findings for policy development and future research.

SOME STYLIZED FACTS

One of the dominant features of the world economy today is FDI by transnational corporations (TNCs). About 449,000 foreign affiliates of fifty-four thousand or so TNCs account for two-thirds of the world trade in goods and services. In fact, FDI has now superseded trade as the most important mechanism for international economic integration (Raghavan, 1996; Mallampally and Sauvant, 1999). In addition, a significant part of gross domestic capital formation in many countries is accounted for by FDI. The stock of FDI is over 10% of the world output (Ietto-Gillies, 1997). The growth of the manufacturing sector in many countries has been the work of TNCs (Chamarbagwala, Ramaswamy and Wunnava, 2000). In today’s knowledge-based economy, their role as an agent of resource transfer has become even more important as no other institution is more able to create and disseminate knowledge than TNCs. Their role in creating employment and opportunities for host nationals is well known. TNCs also act as a conduit of technology transfer from more developed to less developed areas. Thus, the advantages that accrue to host countries are quite substantial.

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Global Economy Journal, Vol. 4 [2004], Iss. 2, Art. 9

DOI: 10.2202/1524-5861.1049



An examination of global distribution of FDI reveals striking patterns. While the overall level of economic development of low, middle and high-income countries varies from each other and among the many regions in which they are located, recent data reveal that many countries have experienced an increase in FDI in the last two decades (Table 1). On the basis of regional breakdown of countries, Europe and Central Asia experienced the highest inflow of investment in dollar terms while the Middle East and North Africa in fact faced a decline in FDI in dollar terms. Grouping countries by income category, high-income countries experienced the highest inflow of investments in dollar terms, while the low-income countries made the greatest progress in attracting FDI (Table 1). Such notable patterns of developments in FDI are highly likely to continue to influence the development process of many countries.

Table 1. Global Trends in Real FDI

Regions and Income Groups FDI (Millions of US Dollars)1980 1990

East Asia and the PacificEurope and Central AfricaLatin America and CaribbeanMiddle East and North AfricaSouth AsiaSub-Saharan Africa

Low income countriesMiddle income countriesHigh income countries

10,347 58,6811097 147558188 380152757 614464 3439834 3271

1502 943322185 109341167908 195922

Source: The World Bank (1999).

Nonetheless, all is not well with TNCs. Economic growth that TNCs contribute to create in host countries is often lopsided because of their location preference in favour of urban areas, which leads to interregional disparities in incomes and opportunities within a country. TNCs have created some employment in recipient countries. However, the results have been less than optimal as they use capital-intensive technology on the one hand, and seek investment incentives in such forms as tax holidays and subsidized or forgivable loans on the other (Seyf, 2000). They sometimes pay higher wages to their employees fostering an environment for job-hopping amongst local workers. Thus, TNCs introduce elements of labour market distortion in host countries. At the macro-policy level, they sometimes influence government decisions for their

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own benefits through threat of reducing investments or by asking the home government to exert pressure on the host government. There have also been cases in the past where they have used their economic power as a threat to get what they want from trade unions in host countries.

There are thus two sides to the story. Earlier studies have examined the effect of FDI on economic growth and uniformly established a positive effect. Given that the measure “economic growth” itself has recently become questionable as an indicator of human progress and given that there is a continuing larger presence of TNCs in developing as well as developed countries, it is time to reexamine the role of FDI on progress made in human development around the world. This is the main motivation for this study.

THEORETICAL ARGUMENTS, VARIABLE CHOICE AND HYPOTHESES

The theoretical framework relating to FDI and human development can be traced from welfare and economic growth literature. Nobel Laureate, Amartya Sen’s work pertaining to welfare economics has stressed the importance of several economic and societal variables bringing about notable changes and generally improving the quality of life of an individual (Sen 1987, 1997 and 1998). In some of his earlier works, Sen (1987 and 1992) has expressed that “while economic analyses have often concentrated on incomes and commodities to judge a person’s advantage, misery and deprivation, there is a need to shift attention to things that people have reason to value intrinsically.” In line with these views, we pursue this matter forward by considering FDI having an influential role for the betterment of individual well being.

Reducing the state of misery and deprivation and improving overall human welfare of the large proportion of the world’s deprived population is certainly an issue of prime concern for many poor countries. The welfare of poorer nations is of equal concern to foreign investors, as their contributions such as employment creation, skill development, income generation and technologicalimprovements can have direct effects in reducing the level of sufferings of the poorer nations. Technological progress has been noted to have an influential effect on societal progress. For example, Solow (1956) emphasised the importance of technological progress as the ultimate driving-force behind sustained economic growth.

While the role of human capital has recently received extensive attention in recent times, it should be noted that attempts to quantify the contribution of human capital to a country’s rate of economic growth could be traced at least as

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far back as Denison’s (1967) growth accounting exercise. Recent contributions to the endogenous growth literature, pioneered by Romer (1986, 1990 and 1994) and Lucas (1988), provide new ways of conceptualising how human capital might contribute to self-sustaining per capita income growth. The endogenous growth theory has certainly re-awakened interest in the role of human capital, providing ample evidence that technology and human capital play an essential role in a country’s development (Barro, 1991 and Easterly, et al., 1994).

Because several factors contribute to higher levels of human capital, hence improvements in human development, this aspect is of prime importance. For example, the new-growth theory gives significant weight to human capital –creating agents who can become more productive through their acquisition of knowledge, increased skills and better health and nutrition. Foreign investors play a positive role in the enhancement of such attributes. Thus, higher levels of individual well being are likely to represent an increase in human capital, hence contributing to higher levels of aggregate output. Increased output generates higher incomes and improves per capita incomes, inducing overall well being. Ranis, Stewart and Ramirez (2000) point out that there exists a strong connection between economic growth and human development: economic growth provides the resources to permit sustained improvements in human development while improvements in the quality of the labour force are important contributors to economic growth.

For sustained levels of human development, technology is equally important in nation building. The new-growth theory explains that technical progress is determined by the “accumulation of knowledge by forward-looking profit maximising agents” (Romer, 1986). Technological progress is considered to generate productivity gains and is an essential component behind sustained economic growth. Other, than investments in technology by host governments, FDI brings in much needed technology as well as technology of a high calibre.

Several factors contributing to economic well being have been identified in previous studies (Sen, 1998 and 2002; Anand & Sen, 2000; Meier & Stiglitz, 2001). For example, Sen (2002) has emphasised that “the importance of global contact and interaction applies to economic relations among others and that there is much evidence that global economy has brought prosperity to many different areas of the globe and in overcoming pervasive poverty.” Foreign investors play a significant role in enhancing global contacts through direct capital investment and international trade.

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Higher achievements in human development can have beneficial payoffs: Barro’s statistical analysis of growth differences across roughly a hundred countries reveals that initial human capital (high levels of schooling) has a significantly positive effect on growth (Barro, 1997). Similarly, Ranis, Stewart and Ramirez (2000) provide evidence of connections between economic growth and human development, noting that achievements in human development can make a critical contribution to economic growth, and that such economic growth will not be sustained unless preceded or accompanied by improvements in human development.

While these several conventional factors do play an important role in bringing about positive changes in individual overall well being, FDI is hypothesised to extend a beneficial effect on human development. Therefore, having established the theoretical issues, a test of the hypothesis that more FDI leads to higher achievements in human development would certainly be useful.

The measure of human progress used in this study is HDI (explained in detail in section 4). Life expectancy, educational attainment, and per capita income are its basic components. That a long and healthy life, education, and a decent standard of living are the essential qualities of human development is its basic tenet. The key independent variable under scrutiny is FDI. However, human development is a complex process, and it would be rash to say that FDI alone accounts for most of the variations in human development across countries of the world. A host of other variables will also influence the process of human development. In what follows, we discuss other potentially significant key variables in accounting for variations in HDI.

ECONOMIC GROWTH

We consider the growth rate in real output as a fundamental variable. Economic growth provides the resources to permit sustained improvements in human development (Ranis and Stewart, 2000). For example, the gross national product contributes to human development through household activity. Higher levels of gross national product mean higher levels of incomes available to households. If households spend their disposable income on necessities (food, water, health and education); then these are likely to contribute most directly to human development. Of course, if incomes are low or badly distributed, a household’s expenditure on human development is likely to be adversely affected and could lead to poverty. Thus, economic growth has an important role in human development. Available evidence shows that, in general, poverty is reduced with economic growth. For example, Bruno, Ravallion and Squire (1995) in a study of

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20 developing countries show that a 10 % increase in average income per capita was associated with a fall in the proportion of people living on less than $1 a day. Further, it is noted that while growth in real output may not be all there is to human development; it is perhaps a necessary condition for such development. For example, the 1996 Human Development Report (UNDP, 1996, p. 113) provides a positive two-way relationship between human development and economic growth.

GOVERNMENT UNPRODUCTIVE EXPENDITURE

Government unproductive expenditure such as a high level of defense expenditure indicates diversion of resources from productive activities to non-productive ones such as the purchase of weapons and recruitment of productive members of the society for military services. This diversion is likely to reduce general welfare, as resources available for other productive and welfare-enhancing activities will be less. In addition to this allocation effect, a high level of military expenditure may lead to the militarization of society. As Blanton (1999:77) has stated, “…the acquisition of arms may tempt the military to forcefully require and maintain acquiescence to the state, even at the expense of individual liberties.” Thus, a negative relationship between defense expenditure as a percentage of gross national product and the human development index is predicted.

MISERY

Poverty and hunger accompanied by a lack of basic needs such as safe drinking water, natural disasters and wars are the culprits for increasing misery of ordinary peoples around the world. Some of these indicators of misery are man-made and others beyond one’s control. Governments not apt to reduce incidences of man-made misery through policies and other instruments are unlikely to care very much about the well-being of their citizens. Also, these governments may not be interested in reducing the effects of natural disasters by soliciting help from the international community. We hypothesize that a high level of misery—created either way--should lead to a low level of HDI.

CONFLICT

The link between conflict and human development can be bi-directional. Long periods of warfare (civil and between countries) can have significant detrimental effects on human development. Warfare, both internal and cross-border directly contributes to the disruption of food, water and health supplies. It

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also causes destruction of infrastructure involved with the supplies of education, health, food and water services, elements essential for human well being.

All in all, human development is a complex process. FDI alone is insufficient to explain variations in levels of human development achieved by nations of the world. Variables related to political, social and institutional factors need to be taken into consideration (Fedderke and Klitgaard, 1998; Nelson and Singh, 1998). This is the rationale for inclusion of the variables discussed above in the empirical analysis to follow. Next, we describe the data, their sources and variable measures.

DATA AND VARIABLE MEASURES

The countries chosen in this study for the empirical work are comprised of samples from the low and middle-income categories (see The World Bank, 1999). Low-income countries are those with per capita GNP’s of US $785 or less. In our sample, these countries include Cameroon, Pakistan, Nepal, Bangladesh, Lesotho, Ghana, Kenya, Malawi, Niger, Rwanda, Burundi, Burkina Faso, Senegal, Cote d Ivory and Zimbabwe.

The middle-income countries are those with per capita GNP’s of US $785 to US$9,655. Although the World Bank classifies middle-income countries in two sub-categories (lower middle-income and higher middle-income), we include countries from both of these sub-categories. In our sample, these countries include Mauritius, South Africa, Swaziland, Botswana, Venezuela, Brazil, Paraguay, Dominican Republic, Bolivia, Tunisia, Morocco, Egypt, Malaysia, Fiji, Thailand, Philippines, Sri Lanka, China and Indonesia.

The choice of the countries in the above two major categories was solely dictated by the availability of published data on variables of interest as discussed in section three.

The availability of data on variables of interest was one major problem encountered. Unfortunately, not all countries have a consistent set of data, and where data is available, the time span is limited. For example, the sample period was restricted due to lack of published long-term data on dependent as well as some explanatory variables for all countries in our sample. However, it was possible to obtain data on point in times for the years 1975, 1980, 1985, 1990, 1995 and 1999 for the chosen sample countries mentioned above. Thus, we have a total number of 90 observations for low-income countries (15 countries x 6 time

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periods) and 114 observations for middle-income countries (19 countries x 6 time periods).

The measure for FDI is FDI net inflows as a percent of GDP. According to the World Bank (2001), it is net inflows of investment to acquire a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, re-investment of earnings, long-term capital and short-term capital as shown in the balance of payments.

The HDI is a summary measure of human development that measures average achievements in a country in three basic core areas of human development. According to the UNDP (2002), these core areas are (1) a long and healthy life as measured by life expectancy at birth; (2) knowledge as measured by the adult literacy rate (with two thirds weight) and the combined primary, secondary and tertiary gross enrolment ratio (with one-third weight); and (3) a decent standard of living as measured by the GDP per capita (PPP US$). For eachof the three core areas, the UNDP calculates an index. The performance in each of the core indicators is expressed as a value between zero and one, zero being the lowest and one being the highest. The index for each of the three core areas is then calculated as a simple average of the indicator indices in that core area.

Economic growth is measured as the annual percentage growth rate of real gross domestic product.

Government unproductive expenditure is measured by military expenditure as a share of total government expenditure. It is the military related expenditures of the defense ministry (including recruiting, training, construction and the purchase of military supplies and equipment) and other ministries.

The measure of misery is the infant mortality rates. It is the number of infants dying before reaching one year of age per 1,000 live births in a given year.

The measure of conflicts is the Freedom House Country Ratings. The Freedom House (see http://www.freedomhouse.org) evaluates each country based on a checklist of questions on political rights and civil liberties that the Freedom House derives from the Universal Declaration of Human Rights. Each country is assigned a rating for political rights and a rating for civil liberties based on a scale of 1 to 7, with 1 representing the highest degree of freedom present and 7 the lowest level of freedom. The combined average of each country’s political rights

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and civil liberties rating determines an overall status of Free, Partly Free or Not Free.

In terms of data sources, the measure for the dependent variable, HDI, was obtained from the Human Development Report 1999 and 2002 (see United Nations Development Programme, 1999 and 2002). The data for all variables except the measure of conflict was 2001 World Development Indicators - CD-ROM (The World bank, 2001). The government unproductive expenditure measure for 1999 for all the countries in the low and middle-income categories were extracted from World Development Indicators 2002 (The World Bank, 2002). The measure for the conflict is Freedom House Ratings available online at http://www.freedomhouse.org

RESULTS AND DISCUSSION

The lack of published long-term time-series data for each country led us to pool the data across the two income categories. Although, pooling has its own limitations as a result of fundamental variations between socio-economic variables from country to country, the countries selected in this study have a range of similar characteristics when it comes to human development. For example, by categorizing the countries in the three income groups, this has dampened variations in human development. As a result, countries now in the low-income category have low levels of human development and countries in the middle-income category have medium levels of human development. This gives ample merit for putting them in one regression. In addition to dampening the country variations, we also take into account the country effects by introducing a dummy variable (dummy), hence estimating a fixed effects model. Our dummy carries a value of one for all countries in the Asia-Pacific region and zero otherwise. Our argument is that countries in our sample from the Asia-Pacific region may have an added advantage of attracting FDI because of high FDI presence in this region.

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Table 2. Regression Results – the effects of FDI on HDI

Variable Low-income countries

Middle-income countries

Constant

Foreign Direct Investment

Dummy

Economic Growth

Government Unproductive Expenditure

Misery

Conflict

NBuse R2

0.638(35.690)*

0.000046(0.0208)

-0.0153(1.085)

-0.00072(1.477)

0.00118(1.838)***

-0.0025(17.21)*

0.00568(2.219)**

900.79

0.801(68.640)*

0.00098(0.869)

-0.0236(2.465)**

0.000479(1.202)

0.0011(2.111)**

-0.00279(25.440)*

-0.00171(1.138)

1140.87

* indicates significant at 1 percent level; ** indicates significant at the 5 percent level; Numbers in parentheses are t-statistics.

For both income categories, the coefficients of determinations are high; hence, the variables chosen are able to explain a significant proportion of the variability of HDI. The results of the middle-income category revealed the best fit. For example, the Buse R-square is 0.87 for the middle-income category compared to 0.79 for the low-income category and these are considered highly satisfactory for models utilising cross-sectional data.

The coefficient of FDI has a positive sign in both income categories and does meet our a priori expectations. While positive, they are statistically insignificant in both categories. The results, while providing weak evidence that

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FDI is positively correlated with human development, suggests that increases in FDI are associated with slight improvements in human development. The results are nonetheless not surprising given the low levels of FDI as well as low achievements in HDI in both income categories. It is now known that FDI has positive effects on the economic growth and export earnings of host countries. Other possible benefits from FDI include technology transfer, increased production efficiency, and quality improvement. These attributes positively influence components of HDI. Hence, the positive signs of the coefficients of FDI are obvious indications.

Turning to our control variables, the results of the economic growth variable, are again as per our expectations but only in the middle-income category. It is positive but statistically insignificant. The positive coefficients indicate that growth in output is fundamental in terms of improvements in human development.

We also measured the level of misery and its relationship to human development. As expected, the coefficient of misery variable is negative and statistically significant in both cases. The results of this variable indicate that the greater the levels of misery, the lower the achievements in human development.

We also controlled for the effects of government and unproductive expenditures on human development. The effect of unproductive government expenditure, does not satisfy our a priori expectations in both categories of countries. The sign on coefficient is positive and statistically significant in both cases. The results provide a strong support that unproductive government expenditures are positively associated with human development. This suggests that an increase in unproductive expenditure (as measured by military expenditure) raises the level of human development. Looking at the defense sector in the low and middle-income countries, the results do make sense. The defense sector in both income categories is a major provider of employment. Thus, through its income effect, it tends to raise achievements in human development. Therefore, the positive relationship is not surprising.

Finally, the result of the conflict variable in the low-income category is obtained as per our expectations. The freedom house ratings measure the conflict variable. As mentioned earlier, a high rating indicates a higher level of political and civil unrest. Almost all the countries in the low-income category had high ratings. The coefficient is positive and statistically significant. The result of the conflict variable strongly indicates that conflicts like warfare resulting in political and civil unrests are strongly associated with human development.

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An issue crucial to the findings obtained here may be an attempt to shed some light on the effects of HDI on FDI. So far we examined the effects of FDI on HDI. It can be argued that a bi-directional causality may well be present, that is, HDI can also influence FDI. The achievements in a country’s human development and more so human capital do matter to foreign investors in terms of their choice for appropriate locations of their investment activities. We attempted to explore this possibility by introducing HDI as an explanatory variable. We dropped the misery variable because of its overlapping effects on HDI but included all other variables as controls. Table 3 presents the empirical results of this effect.

Table 3. Regression Results – the effects of HDI on FDI

Variable Low-income countries

Middle-income countries

Constant

Human Development Index

Dummy

Economic Growth

Government Unproductive Expenditure

Conflict

NBuse R2

1.116(2.416)**

2.197(2.282)**

-0.754(2.893)**

-0.00056(0.0893)

-0.0271(2.787)**

-0.181(3.532)*

900.22

0.0299(0.0231)

1.779(1.064)

-0.535(1.496)

0.0401(2.226)**

0.0408(1.739)

-0.0756(0.9665)

1140.09

* and **indicates significant at 1 and 5 percent level respectively. Numbers in parentheses are t-statistics.

The results confirm a positive and statistically significant coefficient of HDI in the low-income categories. In the middle-income category, HDI has a

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positive coefficient but was statistically insignificant. The results of the low-income category provide strong confirmation that it is achievements in human development that explain FDI. This means that in order to attract foreign investors, high levels of human development are an essential ingredient.

CONCLUDING REMARKS

The original objective of this study was to examine the TNC-welfare nexus within the framework of an expanded conception of development. To that effect, this study has examined the effects of foreign direct investment on the progress of human development for two groups of countries—low and middle-during the period from 1975 to 1999. The empirical results confirm that foreign direct investment exerts a positive effect on human development in the low and middle-income category of countries. However, the positive effect is weak in both cases. Our empirical results have also confirmed that in the low-income group, it is the progress of human development that exerts a significant positive effect on FDI.

The findings of the study have important implications for public policy regarding transnational corporations and host countries. It appears that FDI through positive effect on economic growth and infrastructure creations in host countries contributes towards the enhancement of human development. This then implies that open economic policies with increasing efforts towards integration of national economies into the global marketplace are a necessary condition for human development. And TNCs through FDI act as a conduit for promotion of openness of national economies. Hence, they should be welcomed by countries aspiring to achieve a higher level of progress in human development.

Secondly, TNCs also intend to capitalize on the quality of human capital in host countries. Countries with higher levels of achievements in human development attract FDI. The low-income country case shows that it is in fact the achievements in human development that are significantly important to foreign investors. Thus, host countries should continue to invest more in improving the elements of human development (skills, education, health status and overall worker productivity) of their populations at large.

Nonetheless, policy makers need to carefully examine the issue of efficacy of FDI from the viewpoint of national economic development priorities and be selective in terms of its sectoral composition. National governments also need to develop their bargaining power and negotiation skills in relation to their dealings with TNCs to attract a desirable type of FDI.

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To the best of our knowledge, this is the first empirical study to examine the influence of FDI on the HDI for a large number of countries over a period of two decades. This research thus makes a significant contribution to the burgeoning literature on the role of transnational corporations in promoting human development.

While our research has established a positive influence of FDI on HDI as well as a positive and significant influence of HDI on FDI (low-income category), further research is encouraged on a country-by- country case as the influences of FDI on HDI may be further refined. Hence, more research is needed to extend our understanding of these phenomena.

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DOI: 10.2202/1524-5861.1049



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The Effects of Foreign Direct Investment on Human Development

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