Abstract
The interactions between Foreign Direct Investment (FDI) and human capital formations have strong implications for labour demand and supply factors in developing economies through various ways like training, direct technological diffusion, innovation and imitation. Indian economy has featured rising wage inequality and demographic dividend simultaneously since the last decade. In line with the similar research, the objective of the paper is to empirically assess this effect in Indian manufacturing firms using unbalanced panel data for the period 2001-2015. This paper uses fixed effects panel data estimation technique to get the estimates. The findings reflect that FDI is found out to be stirring up wage inequality with positive relation between relative wages and interaction term of training and FDI suggestive of positive demand side effect of FDI only through this channel.
Highlights
Inquiry into the growth drivers of countries has always been a major issue of research
Foreign Direct Investment1 (FDI) and human capital have emerged as the new factors causing growth of economies
Human capital formation takes place through on the job training, schooling, and other knowledge gained through experience and learning by labour force [6]
Summary
Inquiry into the growth drivers of countries has always been a major issue of research. It may lead to human capital formation through upgrading the skills of human capital of host countries by provision of formal training, schooling and spill-over effects of layoffs and turn overs of labour force from international firm to domestic firms [12] [13] [14]. FDI affects the local level of research and development by creating positive spillovers These may be considered supply side effects of FDI on human capital formation process of the host country. FDI demands specific kind of human capital affects the wages of different categories; highly skilled, mid skilled and low skilled of human capital [15] [16] Both of these effects are crucial as they have long term consequences on labour force of host economy.
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