Foreign direct investments and labor productivity are vital components of a country’s economic growth and development. But how does the latter influence the former? The relationship between these two variables can be captured by analyzing developing countries’ economies. Developing economies are victims of insufficient capital and rely on foreign capital inflow to bolster productivity and economic growth. Foreign direct investments improve labor productivity in the long-run due to the technological advancement they bring. These technological advancements lead to improved skills.
Research has shown that foreign direct investments contribute more to development than domestic investments. The impact of FDIs on host countries is also exacerbated by resulting spillover effects on different sectors of the economy. Technological transmission and managerial skills resulting from multinational firms operating in host countries improve domestic human capital. Foreign direct investments and labor productivity play a crucial part in sustainable economic growth. Research on China’s economy indicates how these two are a function of both short-term and long-term economic development. In the long run, only labor productivity affected a country’s foreign direct investment. Investors consider several factors before settling on a host country for their multinational firm. Investors want a country where the labor force is equipped with the right skills required for production. This reduces marginal cost and makes it easier to scale up production when necessary.
Labour productivity and the right infrastructure improve a country’s integration into the global value chains. Globalization has broken down the production process into several steps. Components of various products are sourced from different countries thus countries with the right fundamentals have seen a rise in foreign direct investment inflow. The Asian tigers enjoyed unprecedented growth rates and industrialization between the 1960s and 1990s due to a highly educated workforce compared to other regions. Higher levels of foreign direct investment and increased labor productivity enhance the economic growth of the host economy through ensuring sustainability in the long run. Political stability is also a factor that has significant impact on foreign direct investment. Political stability takes precedence over labor productivity due to the high risks associated with lack of peace and harmony in an economy.
Policy makers need to comprehend the significant importance of enhancing labor productivity. Vocational training plays a crucial part in this regard and enhances long-term competitiveness of the domestic labor force. Technical training will increase labor productivity and bolster specialization which impacts foreign direct investments and consequently sustainable economic growth and development.