A Note on United States Direct Investment and Human Capital

Abstract

It has become increasingly recognized that international direct investment flows are not simply transfers of physical capital; they also involve transfers of skills and knowledge. The manpower that accompanies physical capital constitutes a human capital flow. An attempt to measure the magnitude of the human capital outflow in U.S. direct investment has been made by Yudin (1968). Yudin also shows that the occupational distribution of Americans abroad is much more skill-intensive than the distribution of the labor force in the United States. This result constitutes evidence that there is a large human capital outflow involved in U.S. investment abroad.' However, it is not a surprising finding, since we would expect, for economic and sociological reasons, that the upper end (in skill terms) of the U.S. occupational distribution would be more internationally mobile than the overall labor force. First, on sociological grounds, we would expect that Americans at the upper end of the skill distribution are more likely to desire to, or to be willing to, go abroad. Second, the cost of sending highly skilled (and higher paid) Americans abroad is proportionately less than the cost for less-skilled Americans. An essential question concerning the causes of the human capital outflow remains. The outflow can be determined by either a shortage of the Americans' skills in the host countries or a preference of the direct investor to use Americans rather than qualified native personnel in foreign positions. The question is: Is the factor flow caused by differences in international factor endowments or by discrimination against available local personnel? In this note we ask if the pattern of U.S. direct investmenthuman capital flows is explained by differences in factor endowments. We deduce from a simple model of a direct investor's factor choice that factors will flow according to endowment differences. We then present empirical evidence that direct investment-human capital flows are more strongly directed toward countries where the human capital endowment