Exploring the causal link between FDI and human capital development in India

Abstract

This paper explores the spillover effects, both direct and indirect, of foreign direct investment (FDI) inflow on human capital development in India and also whether the latter causes the former or not. The results showed that there is only weak unidirectional causality from FDI to human capital development defined as percentage change in annual student enrolment. However, human capital development defined as expenditure on higher education and the number of higher educational institutes across 16 zones in India had a positive correlation with FDI inflow. Inflation and import growth were other important determinants of FDI growth. The paper concludes that expenditure on primary education might crowd out investments in infrastructure development which attracts FDI inflow in the short run. However, allocation of more resources for primary education may be more rewarding in the long run through development of a strong human capital base acting as a catalyst for attracting the global investors.