Virtuous Circles? Human Capital Formation, Economic Development, and the Multinational Enterprise Organised by the Oecd Development Centre

" …the primary determinant of a country's standard of living is how well it succeeds in developing and utilizing the skills, knowledge, health and habits of its population. SUMMARY In recent years, academics and policy-makers have emphasized the role of human capital formation in economic development. By creating human capital, countries become more attractive to private investment, both domestic and foreign. And through such investment, countries grow and prosper. Yet the empirical evidence in support of this theory remains elusive. While FDI has multiplied in many countries around the world since the 1980s, its effects on growth are uncertain. Why is that the case? In this paper I argue that political economy pathways exist that may lead countries away from sustained growth. In countries which lack well-developed capital and education markets, many otherwise qualified citizens may be denied the basic skills they need in order to contribute fully to the nation's economic development. As societies become divided, they become more conflicted, and this conflict dampens growth, irrespective of the level of foreign direct investment. Introduction Since the early 1990s, an increasing number of emerging market economies have opened their countries to foreign direct investment (FDI) in the hope of stimulating development and growth. In Latin America alone, net FDI flows climbed from $18 billion in 1990 to more than $85 billion in 1999. The firms making these investments constitute over 13 percent of manufacturing employment in Brazil and more than 17 percent in Latin America. In central and eastern Europe, foreign direct investment has risen from negligible levels in the early 1990s to nearly $20 billion in 1999, and again countries in that region have relied heavily on FDI as a stimulus to their growth prospects. In Asia the numbers are most staggering of all, with flows climbing from $60 billion in 1990 to $120 billion in 2000; today, FDI makes up more than 10 percent of the region's gross fixed capital formation (UNCTAD 2001).