Foreign Direct Investment in Education

Abstract

Historically, education was not amenable to foreign direct investment (FDI). Considered as a “public good”, it has been traditionally dominated by the public sector. The State financed, and is still financing, education at all levels. The dominant providers of education have been public and/or private non-profit institutions. With no profits to be made, education has thus remained outside of the realm of market forces, and trade and FDI. This, however, started to change some two decades ago, especially with regard to tertiary education. One reason has been an explosion of demand for tertiary education from emerging and rapidly growing middle classes of developing and transition economies, partly resulting also from government — backed progress in secondary education, producing increased number of candidates for higher education. Governments have not been able to cope with this demand, even though many have increased funding of tertiary education. Another reason is that better-off households in developing countries, facing the supply gap and often lower quality of tertiary education in their own countries, have shown an increasing willingness to pay for education of their children abroad. Not being able to cope with the growing demand, an increasing number of developing countries began to allow the private provision of tertiary education, including foreign provision through FDI. Countries not facing supply constrains have allowed private education in the hope of increasing the quality of education. Developed countries, facing budgetary constraints, have encouraged their non-profit institutions to seek additional sources of revenue, including from fee-based education. All this, as well as other factors, has given rise to the emergence and growth of FDI in education, mainly in the tertiary education. The paper, first, documents growing FDI in education in general, and in tertiary education in particular, using data from various sources. Attention is given to non-equity modes of cross-border provision of education, which are still much more important than modes resembling FDI. This is done against the background of the internationalization of higher education: FDI is but one of the modes of internationalization. Second, drivers and factors behind the expansion of FDI are discussed for host and home countries, as well as for higher education institutions. Third, the paper deals with potential benefits and risks of host developing countries associated with FDI in education. Fourth, it concludes with a review of regulatory issues and host countries’ policies for FDI in tertiary education, including policies aimed at maximizing benefits and minimizing adverse effects of FDI.