The location of inward investment, technical change and skilled labour: Evidence from the United States

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Highlights

► Analyses US inward investment using techniques associated with factor proportions. ► Finds that both skilled (educated) labour and computer usage are important in US inward FDI. ► The same high skill, high tech sectors are also the ones with higher productivity growth. ► Econometric analysis supports OLI theory and in particular knowledge (strategic asset) seeking. ► Strategic asset seeking behaviour overlaps with both market and efficiency seeking influences.

Introduction

The primary objective of this paper is to provide an empirical analysis of the role of skilled and educated labour and the role of technical change in the location of US inward foreign direct investment (FDI) and to analyse the interaction between the two. Although the paper's main interest is in educated labour and technical change the analysis is set within a more general and more traditional factor proportions framework. This is not to say that the analysis presented relies on a theoretical foundation based on factor proportions. In fact it seeks to test locational aspects of Dunning's (1988) OLI theory. Specifically, it is argued that some of the insights from a factor proportions approach have a potentially useful contribution to the understanding of locational aspects of FDI. In this particular case a key contribution is to provide useful tools for empirical analysis. That is, this paper borrows and extends empirical techniques but not theory more commonly associated with the analysis of international trade to provide evidence on the location of FDI.

Although the main interest of this paper is in the influence of educated (skilled) labour and technical change on FDI it is useful to set this in the context of a broader set of factors of production. The paper seeks to test Dunning's (1998) argument with respect to the importance of knowledge seeking motives in the location of FDI. However, its approach is to consider knowledge seeking motives within the broader OLI framework – for example, alongside resource seeking and market seeking motives. A number of authors such as Blonigen (2005) have commented on the relative scarcity of empirical research dealing with the determinants of the location of inward FDI. Other authors, such as Pflüger, Blien, Möller, and Moritz (2010), in commenting on research focused on the importance of skilled labour, have suggested there is a need to move away from a simple dichotomy between skilled and unskilled labour. In addition to its methodological approach the contribution of this paper to the literature is to address both of these limitations.

Section snippets

Review of literature

Dunning (1998) discussed the difficulties of integrating traditional trade theories with locational aspects of the theory of the multinational enterprise (MNE) but expressed the view that: “…the principle of comparative advantage still has much going for it as to how best to allocate scarce resources between countries.”. In this context he made reference to the work of Wood (1993), a study which employs factor content techniques. The paper presented here is very much in this tradition, in that

The factor content of trade

The traditional factor content or Heckscher–Ohlin–Vanek (HOV) model, Vanek (1968), can be stated as follows:AT=VsVwwhere A is a (k × n) matrix of factor requirements, giving the amount of each of k factors needed to produce one unit of each of n outputs, T is a (n × 1) vector of net exports of (exports less imports) each sector, V is the (k × 1) vector of domestic factor supplies, Vw the comparable vector of world factor supplies and s a scalar given by the ratio of domestic to world GDP.

The data

Inward FDI flows and stocks

Data on inward FDI in the US were downloaded from the Foreign Direct Investment in the United States database from the Bureau of Economic Analysis, US Department of Commerce. The variable used was the Direct Investment Position on a Historical Cost Basis (stocks). A small number of observations were suppressed on confidentiality grounds. Since, the FDI data needed to be matched with the US input–output data some sectors were combined to a more aggregate category for which FDI data were

The factor content of US inward FDI

This section identifies the key characteristics of inward investment in the US with respect to factor markets over the period 2002–2008. It seeks to identify whether or not inward FDI in the US is concentrated in sectors intensive in one particular factor of production or not. For example, evidence that US inward FDI is focused in sectors that are relatively intensive in natural resources would suggest the importance of resource seeking motives. Of more particular interest is whether investment

Total factor productivity measures

Since a key emphasis of this paper is on examining evidence for knowledge seeking motives in inward US FDI some indications of technical change are important. Table 3 presents mean annual percentage changes in multifactor (total factor) productivity for a selection of sectors of the US economy. These were calculated from indices published by the US Bureau of Labor Statistics.

Some of the sectors identified with high rates of multifactor productivity (MFP) growth are no surprise. Computer

Regression estimates

Table 5 presents the results of regression analysis of the model specified in Eq. (3) (see Section 3.2) using stocks of US inward FDI as the dependent variable. This specification is effectively a statement of the locational component of the OLI theory, measured in embodied factors of production rather than by industry. Two separate sets of regressions were estimated – one with labour classified according to the educational requirements of occupations and the other using the ISCO88 occupational

Managerial implications

The findings of this study have several important insights for the management of firms with existing affiliates in the US and for those considering establishing a US affiliate. In particular they help to identify the elements of the value chain that are typically of importance in US affiliates and help to highlight the interdependence of several different elements. They also help to make clear that, although US affiliates depend much on the contribution of both skilled labour and technology, it

Acknowledgements

The author is grateful to three anonymous referees for constructive and helpful comments on an earlier version of this paper. He is also indebted to Professor Jenny Piesse for comments and advice on a draft.

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