Foreign Direct Investment and Education Investment in Developing Countries

We introduce a model to explain the economic rationale for the observed policy combination of a developing country (hosting foreign direct investment (FDI) through education investment (EDI)) and the interest of a multinational corporation (MNC) in the local labor quality when it contemplates FDI. Information on local labor is the source of a more efficient contract for the MNC with local labor, and the local government can benefit both agents through EDI, FDI, and information sharing. This strategy set is likely to be used by a country in the early stage of economic development. The education level chosen by the local government, however, will be higher than that which maximizes the welfare of local labor. In that sense, the government has the incentive to benefit itself and the MNC at the expense of local labor