Health and Foreign Direct Investments: What Matters?

Presenter: Francesco Renna, University of Akron

Abstract

Rational: Foreign direct investment (FDI) has been growing faster than trade and income in recent years. However, FDI flows vary considerably by regions and countries. For example, in 1997, approximately 22% of FDI went to Asia while only 1% went to Africa. It is these regional differences in FDI flows that have led to extensive research on the kind of factors that attracts FDI. Generally, the level of human capital is considerate an important factor. Most of the previous literature has looked primarily at education. However they have failed to consider health as being an important component of human capital as well.

Objectives: The objective of this paper is to conduct a cross-country investigation on the impact that different dimensions of health have on FDI. First, we compare the impact of transmittable diseases, such as malaria, tuberculosis, and AIDS, to the impact of non-transmittable diseases, such as diabetes. Furthermore, this paper wants to distinguish between the impact on population health that can occur through changes in human capital and the effect that can occur through government commitment to population health. We aim at disentangling this relationship by including additional variables that capture the level of government investment in population health as well as the amount of health infrastructure available in the country.

Methodology: We look at two measure of FDI: (1) average per capita inflows between 2003 and 2005, and (2) log FDI stock in 2003. We control for different dimensions of population health. First, we look at "life expectancy". Then, we include a series of variables that measure the incidence of important transmittable (aids, tuberculosis, and malaria) and non-transmittable (diabetes) diseases. Finally, we include public health expenditure as a percentage of GDP and the number of doctors per 1,000 people. Each estimation controls for standard covariates in FDI analysis with market size (population), country openness (sum of imports and exports as a percentage of GDP), human capital (enrollment in secondary school), and various geographical variables.

Results: Preliminary results indicate that government expenditure on health has a positive effect on FDI inflow. An increase in public health expenditure as a percentage of GDP by 1% increases the stock of FDI by 7%. Similarly a $100 increase of per capita public expenditure of FDI increases per capita FDI flow by $3. There is also evidence that the incidence of transmittable and non-transmittable diseases have a negative effect on FDI.

Conclusion: The results of this research suggest that population health is an important determinant of how FDI flows among different countries in the world. The policy implications of this research are that governments of developing countries can attract FDI by investing in their population's health.