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

How do multinational firms affect both the demand for and supply of skills in hostcountry labor markets? On the demand side, inward can FDI stimulate demand for moreskilled 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 microand 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. Tuck School of Business, Dartmouth College, 100 Tuck Hall, Hanover, NH, 03755. [email protected]. For helpful comments I thank David Howell, Will Milberg, and other participants at the New School University’s CEPA Conference, “Labor and the Globalization of Production,” March 8, 2002.