Improving the national skill set is an important policy objective for both developed and developing countries. The level of skills in the local population – a nation’s human capital – is a key determinant of economic development and growth. At the same time, globalization has made human capital and skills development even more important. The reduction in trade barriers and the surge in international trade and foreign direct investment (FDI) by transnational corporations (TNCs) have resulted in the need for workers and businesses to be competitive on a global scale.
TNCs, being on average more productive and technology-intensive than domestic firms, tend to bring positive contributions to the local economy, including in the form of skills development. TNC activity and skills upgrading have a complementary relationship, as they tend to reinforce each other (UNCTAD, 2002). While an enhanced skills base leads to a more attractive investment climate for TNCs, FDI can be exploited as a vehicle to promote human capital formation. However, the positive impact of FDI inflows on the local skills base is not automatic. This study examines the cases of Canada and Singapore to consider the types of policies that can be used to integrate FDI and skill development.
The complementarities between FDI and human capital development can initiate a "virtuous circle". A strong local skills base tends to attract FDI inflows, while foreign TNCs can, in turn, contribute to the local skills base through spillovers to employees and local firms, induced migration, and participation in local education and training institutions. The host country’s level of human capital determines not only how much and what type of FDI can be attracted, but also the extent to which the local economy is able to absorb the potential skill transfers associated with TNC activities.
Government policies are instrumental in initiating and fostering the upward sloping FDI and skills circle. First, to attract TNC investments, host countries need to have a relatively open framework for foreign investment and an attractive business climate. However, more targeted policies are also important, as they can help secure the types of FDI most likely to contribute to skill formation. Second, foreign investors require policies that provide sufficient access to skilled labour. Domestic education and training policies are fundamental to ensuring a sufficient level of appropriate skills for a given economy. Yet, migration policies can also be designed to augment the national skills base and ensure that foreign investors have access to skills that may be missing domestically. Third, government action is often necessary to maximize skill spillovers from TNC activities. Dissemination policies, such as incentive programmes, may be required to partially compensate TNCs for their skill transfers. Moreover, a national innovation system that encourages cooperation between local research institutions, foreign TNCs, and local firms can lead to higher levels of skill spillovers.
The above policy elements need to be carefully designed and sequenced for the FDI-skills circle to initiate and function effectively. Inadequate attention to specific policy areas may result in discontinuations and interruptions of the upward sloping cycle and lead to unsatisfactory or even unintended outcomes. By reviewing the trends, institutions and policies related to education, migration, FDI promotion, and the subsequent dissemination of skills to the local economy, this study identifies lessons on how countries can effectively integrate FDI in pursuit of their broader skills development objectives.
