Human Capital Development and Its Influence on FDI Withdrawal: An Empirical Analysis

Abstract

This paper examines the causal effect of human capital expansion on the exit of foreign-owned firms using the difference-in-differences method together with a quasi-natural experiment involving the expansion of higher education in China in 1999. The expansion of human capital reduces the probability of the exit of foreign-owned firms significantly. This conclusion remains robust under a series of tests, including changing the sample range, adjusting the identification method, and considering the trade liberalization. Analysis of the mechanism indicates that human capital expansion reduces the exit probability of foreign-owned firms by stimulating innovation, improving production efficiency, and optimizing the quality of input and output goods. Industries with higher asset specificity are also more likely to restrain the exit of foreign-owned firms through human capital expansion. Overall, the findings of this study provide a good insight into the exit behavior of FDI in China from the perspective of human capital.