Theoretical literature on FDI focuses largely on the positive impact of FDI on the human capital development. However, it can be argued that it is not the inflow of FDI that develops human capital, rather, the developed human capital leads to the inflow of FDI and in the process human capital gets enhanced. This article highlights this fact in the light of the experiences of different countries.

It is believed that economic growth of a country varies directly with the flow or transfer of Foreign Direct Investment (FDI) into the country. Most of the developing countries of the world have been designing policies and developing infrastructure to attract FDIs. The investing countries usually supply superior technologies to the host countries. In the initial stages, however, the Less Developed Countries (LDC) lack not only the necessary skills and infrastructure to attract FDI in the technology sector, but also the knowledge for proper implementation of the technology. As this requires less technical capabilities, skill building in the host LDC is less, but such skill building, even though small, creates a platform for the LDC to develop their existing technology and capital productivity. This helps in improving the human capital of the country by facilitating education and technical training to a greater mass of people. Eventually, with the development of the economy, the country moves from the subsistence level to the point where dependence on FDI gradually shifts from the mere manufacturing level to the managerial level of a company. At this point of time, the LDC should aim at attracting effective FDI. By effective FDI we mean the FDI that is development friendlyFDI that fosters not only the growth of the nation, but also the growth and development of each resident of the country. In other words, effective FDI indulges in enhancement of human capital of the country. Human capital is defined as the stock of economically productive labor force of a country.

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