Is human capital relevant in attracting innovative FDI to China?

Abstract

The impact of human capital on foreign direct investment (FDI) has been assessed in an essentially descriptive manner. In general, most quantitative studies focus on the macroeconomic level, that is, the level of countries. Microeconomic studies, with firms as the unit of analysis, are scarce internationally and even more so in the case of China. Based on a survey performed on several innovative firms in China, this study assesses the importance of human capital in attracting FDI to China, and estimates is corresponding impact. This impact is analyzed based not only on the direct, but also the indirect effects of human capital, through the firms' Research and Development (R&D) efforts and contacts with universities. Using a sample of 77 firms, and considering two proxies for human capital (general and specific), we concluded that even though human capital does not constitute a direct factor in attracting FDI to China, it is a positive indirect factor by way of R&D efforts. We have also established that knowledge infrastructures (universities) and physical infrastructures (transport network) comprise important factors to attract FDI.