Impact of Labour Dynamics on Foreign Direct Investment Inflows in Asia

Abstract

This paper examines the impact of labour dynamics, i.e. skill level of labour force, labour cost and female labour force participation, on Foreign Direct Investment (FDI) inflows in Asia. Employing secondary data of 31 Asian countries from 2000 to 2015, we analyse the impact of labour dynamics on FDI inflows separately for ‘low income and lower-middle income’ (LLMI) countries and ‘high income and upper-middle income’ (HUMI) countries in Asia. Besides, regional differences in Asia are also analysed. The panel data analyses suggest that cost and skill-level of labour are the key labour dynamics that attract FDI inflows to Asia. In addition to labour dynamics, large-market size and infrastructure improvements are also significant determinants of FDI inflows. However, these determinants are significantly different across Asia. FDI inflows into HUMI countries were attracted by large market size, improved infrastructure and low female participation to the labour force. In contrast, the availability of a skilled labour force and high female participation to the labour force and improved infrastructure were key determinants to attract FDI inflows into LLMI countries. Findings clearly revealed that skilled labour is a key determinant of FDI inflows to LLMI countries. Therefore, developing countries in Asia can attract resource seeking FDI inflows by investing in human capital and developing infrastructure for knowledge-intensive industries.