As illustrated in the above model, level of human capital in an economy plays a vital role in

attracting FDI inflows. The existence of direct causal relationship between human capital and
FDI has been empirically shown in various studies. Laura Diaconu (2016) shows a positive
relation between the two based on empirical research. Huseen Ali, Imran, Tasmeen (2013) use
econometric tools to show a positive relation between human capital and FDI. We use a linear
multivariable regression analysis to show that human capital is one of the important
determinants of FDI inflow. Determinants of FDI other than human capital, that are commonly
found in related literature are foreign ex., resources available in and infrastructure of the host
economy. Hence, we get a regression equation as:

𝐹𝐷𝐼𝑖 = 𝛽0 + 𝛽1 . 𝐻𝐶𝑖 + 𝛽2 . 𝑅𝑒𝑠𝑖 + 𝛽3 . 𝐼𝑛𝑓𝑟𝑎𝑖 + 𝛽4 . 𝐹𝑜𝑅𝑒𝑥𝑖

where, 𝐹𝐷𝐼𝑖 : FDI inflow in the ith period

𝛽0 : Intercept of the model

𝛽1 : Co-efficient for the level of human capital in ith period

𝛽2 : Co-efficient for availability of resources in ith period

𝛽3 : Co-efficient for infrastructure in ith period

𝛽4 : Co-efficient for foreign exchange rate in ith period

Data:

The data for FDI along with the other variables is taken from website of World Bank. Our data
set is for India over the period 1990-2016.

Data Description:

FDI: World Bank data is used to measure each country’s FDI net Inflow in US$ Millions.

Human Capital: Human Development Index has been used as the proxy for Human Capital
Index since the components of these two measures are similar.

Availability of Natural Resource: Total Natural Resource rents as percentage of GDP has been
used as a proxy for availability of natural resources.

Infrastructure: Total distance covered by active railway lines is used as a proxy to measure
infrastructure.

Forex: Yearly average of official exchange rate is obtained from website of World Bank.

The table below shows the results:

 Human Capital Natural Infrastructure Foreign
(HC) Resources (Infra.) Exchange Rate
Variables (Res.) (FoRex)

Coefficients 306981979872 777175608 732169 -589200498

T-values 3.09 0.44 0.23 -1.57

P-values 0.005 0.663 0.820 0.131

The regression equation is:

𝐹𝐷𝐼𝑖 = −1.6897830519𝐸 + 11 + 306981979872 𝐻𝐶𝑖 + 777175608 𝑅𝑒𝑠𝑖

+ 732169 𝐼𝑛𝑓𝑟𝑎𝑖 − 589200498 𝐹𝑜𝑅𝑒𝑥𝑖

and R-square = 87.52%

The P-value for the coefficient of human capital is 0.005. This implies that the positive value
of the coefficient of Human Capital is statistically significant. Hence, we conclude that higher
level of human capital leads to higher FDI inflow.