The impact of human capital and skill availability on attraction of foreign direct investment (FDI) into regions within developing economies

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This paper will test the importance of the relationship between geographic distribution and clustering of foreign firms and the influence of human capital and skill present in the regions, generally represented by major cities, on the location choice strategy and innovation activity of foreign investors across regions in the host economy of a developing nation.

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Nội dung Text: The impact of human capital and skill availability on attraction of foreign direct investment (FDI) into regions within developing economies

International Journal of Management (IJM) Volume 9, Issue 3, May–June 2018, pp. 139–163, Article ID: IJM_09_03_015 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=9&IType=3 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication THE IMPACT OF HUMAN CAPITAL AND SKILL AVAILABILITY ON ATTRACTION OF FOREIGN DIRECT INVESTMENT (FDI) INTO REGIONS WITHIN DEVELOPING ECONOMIES Arkadiusz Mironko Indiana University East, United States ABSTRACT When making a strategic location choice multinational corporations (MNCs) examine a number of conditions which influence the investment before settling on the location choice that includes human capital and availability of skilled workforce. This paper will test the importance of the relationship between geographic distribution and clustering of foreign firms and the influence of human capital and skill present in the regions, generally represented by major cities, on the location choice strategy and innovation activity of foreign investors across regions in the host economy of a developing nation. Testing the data on the location of foreign firms and skilled workforce (among other factors) in the regions across Poland, this study finds that a higher level of presence of skilled workforce in the regions tends to attract higher value-added and service-related foreign subsidiaries into them hence, furthering the development of the host cities and regions.Also, the industries with higher amounts of foreign investment tend to narrow their industrial specialization, in some regions including also smaller regions such as Podkarpackie, while Mazowieckie (the leading region) continues to attract higher value-added and service FDI despite the highest labor cost. Key words: Human Capital, Skilled Workforce, Location Choice Strategy, Multinational Corporations, Foreign Direct Investment, Competitiveness of Regions, Developing Economies, Agglomeration, Innovation. Cite this Article: Arkadiusz Mironko, The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies, International Journal of Management, 9 (3), 2018, pp. 139– 163. http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=9&IType=3 http://www.iaeme.com/IJM/index.asp 139 editor@iaeme.com
The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies 1. INTRODUCTION The salience of geography remains a crucial determinant in the location choice strategy sought by foreign investors when establishing new subsidiaries in developing economies. When making a strategic location choice multinational corporations (MNCs) examine several conditions which influence the investment before settling on the location choice that includes human capital and availability of skilled workforce (Ellison and Gleacer, 1997). Generally, according to a vast majority of research on the subject, investing MNCs are in pursuit of new resources and markets (Birkinshaw, 1997; Dunning, 1997). Knowledge and skill are also viewed as a resource delivered by skilled human capital already present in the host economy. Knowledge generating needs technological skill and development (Cantwell, 1989) which, in turn, increases efficiency and productivity of the firms present in the agglomeration. Additionally, cities and agglomerations richer in the skilled workforce also tend to exhibit faster growth in wage earnings (Shapiro, 2005; Florida, et al, 2008) adding a sought-after benefit by host regions. These studies demonstrate a development of a trajectory that builds on the existing resources in the region, in this case, skilled labor (among other factors), and, in turn, contributes to the future growth of the host region. Firms in resource-dependent sectors, except leading firms, generally locate in the existing industrial agglomerations relevant for a particular foreign firm (Mironko, 2014).Therefore, the reentering firms tend to benefit from the resources present there, the presence of specialized input providers, the workforce, and skilled workforce needed for operation of the particular subsidiaries in the chosen locale. A right combination of investment, both foreign and domestic subsidiaries present in the area, and local skill, are needed to benefit the local economy. Additionally, testing location patterns of foreign firms in Ireland, Barrios, Görg, & Strobl, (2006) have found that hi-tech firms spread evenly across the country, and that urbanization economies where skilled labor can be located, were more important locational determinants than public incentives for these firms. The firms choosing locations within developing economies are therefore pressed to understand the dynamic between the level of labor, including skilled, and the employment rate. The lack of skilled labor in an agglomeration will, in general, adversely position it only for low skill seeking investment. Majority of the studies on the location of FDI look at the choice location between countries. This study will look at a unique combination of regional economic factors regions within a country may provide sought resources to foreign firms choosing to locate its subsidiaries in a chosen host region. The impact of competitive advantages and economic factors sought by foreign subsidiaries will be further explored here. The data analysis used here will examine concentrations of foreign investment in all regions of Poland (voivodships - wojewodztwa) with the particular focus on areas, generally represented by main cities in the regions, historically possessing a substantial amount of economic activity and an early presence of foreign firms. As a result, these areas have been historically developing or attracting the workforce needed to support their economic activity, reinforcing the existing industrial trajectory of the regions, and becoming a stronger platform in which future investors can settle their operations. Overall, majority of the research on regions in Poland, similar to that of Despiney-Zochowska (2001) and Cieślik (2004) concludes, that three regions in Poland, in some studies four at most, are most often selected as the host for the foreign investment. They are Mazowieckie (capital region), Wielkopolskie, Dolnośląskie, and Śląskie (Cieślik, 2004 and Chidlow et al., 2009). The selection of Poland as a subject of this study provides an example of a transition economy on the periphery of the European Union (the EU). The study period also reflects a transitional dimension of preparation and accession into a union of the European states, mostly highly developed. Hence, this case offers a unique dimension of pre and post the EU http://www.iaeme.com/IJM/index.asp 140 editor@iaeme.com
Arkadiusz Mironko accession impact on the attraction of FDI and their specific location choice between regions within accessing countries. Additionally, this study will pay close attention to the smaller and peripheral regions which, largely, demonstrate strong ability to attract only narrowly focused industries, mainly due to the existing, legacy industries, and, therefore, have the presence of the skilled labor necessary to attract foreign firms in the industries present there. The level of presence of foreign subsidiaries in each region in Poland will be analyzed here along with the levels of skilled workforce, labor cost represented by wages, foreign investment spending, and market size of the regions to determine which locational advantages sought by the foreign investment attract foreign subsidiaries into the regions. Most importantly, as the majority of the literature on location patterns in transition economies focuses on location choices by considering national economies, or, rather only major areas within those economies, this study will help in understanding what motivates foreign subsidiaries to locate across all regions of Poland; hence, revealing narrowly specialized and rarely mentioned advantages of all the regions within a country. Obviously, not all agglomerations across regions within developing economies benefit equally form FDI, if at all. This study will examine this dichotomy by determining which regions are able to benefit from FDI and increase wages without deterring future subsidiaries to select the same regions to locate there (Görg, and Greenaway, 2004). The study will look at the economic landscape of Poland, an economy in transition, and a new member of the European Union. The period of the study will span the interval before Poland’s accession into the EU, as well as immediately after the joining of the block. Also, the findings of this study will add to the exploration of the strength of the regions within transitioning economies, and show the interaction between local strengths, and location choice of FDI into the agglomerations within themPoland, the largest of the new members of the EU, (2004 accession) offers a good sample and diversity of economic landscape being close to the largest economy of the EU, Germany, on its west side and also representing periphery of the EU on its east side. The study of Brülhart (1998) reflects a strong concentration of Europe’s economic core along with a heavy concentration of high-tech industries, while the less skill-intensive and more labor-intensive industries were dispersed around the periphery of the European Union’s boundaries.By examining all regions within Poland, not only those with most robust economies, this study will add to an ongoing debate on location patterns of foreign subsidiaries in transition economies differentiating between its core industrial centers and the geographic peripheries. http://www.iaeme.com/IJM/index.asp 141 editor@iaeme.com
The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies Figure 1 Regional investment per capita. Source: Based on data from the Central Statistical Office of Poland and the author’s own analysis The next section will discuss the problem setting and regional industrial specialization patterns of FDI with its location trajectory across regions in Poland, while section three will cover data and methodology. Then, section four will briefly discuss the results of the analysis and then section five will propose some recommendations relevant to the foreign subsidiaries location decision makers, and the host economic development policy makers seeking to attract FDI into their regions. 2. THE PROBLEM SETTING The central issue addressed in this paper is the importance of the relationship between geographic distribution and clustering of human capital and skill, and their influence on the location choice strategy and innovation of foreign investors between regions (mainly cities and their vicinities) in the host nation’s economy. Historically, MNCs searching for new locations to establish their subsidiaries in developing economies focused on acquisition, and exploitation of resources, and access to new markets as presented by Dunning (1991) in his eclectic paradigm. The new foreign investors decision choice of location within a host transition economy engages crucial factors of economic activity, availability of skilled workforce. This includes the degree of presence of the existing economic and industrial activity, density of foreign firms already present in the region, the amount of foreign investment, and infrastructure level (including transport and telecommunications). Although, the size of the local market, distance to exogenous markets, and competition with local firms matters as well. The literature on the location patterns of FDI offers a common theoretical and empirical consensus that almost all industries are localized to some extent. Ellison and Glaeser (1997) developed an empirical test to confirm that theses on the examples of geographic concentration of industries in some US regions. They also considered the presence of corporate networks emerging as a result of upstream and downstream inter firm supplier relations, and availability of skilled workforce in the region they choose to locate in (Griliches, 1969). Such existing specialized inter- and intra- http://www.iaeme.com/IJM/index.asp 142 editor@iaeme.com
Arkadiusz Mironko industry networks were also identified as the engine behind the attraction of new firms, and regional industrial advancement across regions in Poland (Cieslik, 2004; Chidlow, et al, 2009; Mironko, 2014, among others). The challenge for the host regions within economies receiving FDI remains, so, how can they continue to attract foreign investors to set up operations within their regions? Subsequently, how can they increase wages for the local workforce to attract workforce with necessary skill set while maintaining competitiveness towards foreign investors? At the same time, how can they avoid diminishing return on investment to both foreign and domestic firms? In fact, in many cases, as a consequence of increased competition for skill, indigenous firms are in a less advantageous position as foreign firms are largely able to offer higher wages (Görg, and Greenaway, 2004). The increasing move of foreign direct investment into targeted host economies opens the question - which economic factors are determining sub-national location choices?This study will explore this question in further detail and try to fill the gap for the transition economies by examining relevant variables in the location decision-making process by foreign subsidiaries in developing economies. 2.1. Industrial Specialization of Regions and Foreign Investment’s Role This research is motivated by a question, where within Poland foreign investors choose to locate based on skill and workforce availability in the regions and testing here, whether the level of presence of skilled workforce advances the location choice by foreign firms in the host economy? The salience of access to workforce and skilled workforce are crucial determinants in the selection of a locale for new subsidiaries in the host economies. The earlier research – for example that of, von Thünen (1826), Marshall (1920), Knickerbocker (1973), Cantwell and Piscitello (1997), and Ellison and Glaeser (1997) – shows that firms choose to locate in close proximity to each other, whether they engage in the same, similar, or even different types of activities, to draw on the existing (in the agglomerations) mutually beneficial economic factors such as labor, markets, natural resources, and skills. These, and other studies, explain such a co-location by the capability to absorb the knowledge transfer and know-how in the target locations. It is also important to keep in mind that not all industries present in a locale benefit from FDI (Hirschman, 1958). This can beat least partially, explained by different motives for entry to the new markets by foreign firms. As firms in heterogeneous industries diverse drivers for the investment and seek different types of locational economic factors present in the chosen locale. The existence of an agglomeration economy formed of foreign-owned firms, in addition to the presence of indigenous firms, may be a further motivator for foreign subsidiaries to cluster together (Vernon, 1979).These conditions may be favorable to the exploitation of factors specifically needed by foreign firms, that is, skilled labor, or specialized input providers (Bell and Pavitt, 1995).Certainly, due to risks and costs involved, foreign firms must carefully consider advantages available at particular locations before establishing a subsidiary. The studies by Birkinshaw and Hood (1998), and Cantwell and Mudambi (2005) identify the elements of the group strategy based on the initiatives given to subsidiaries by their headquarters to determine the characteristics of the location and type of firms that are attracted to the location (whether strong attract weak or reverse dynamics). They, also, emphasize the dichotomy – enhancement versus depletion of capabilities in a subsidiary – which may result in an explicit change of the subsidiary’s business direction. As not every firm has the same motivation and capability, local economic conditions will have a specific impact on each entering firm based on the industry, and the firm’sown level of knowledge and absorptive capability. http://www.iaeme.com/IJM/index.asp 143 editor@iaeme.com
The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies Ideally as Ellison and Glaeser (1997), among others, propose that as subsidiaries of foreign corporations establish their firms in host economic regions, the possibility of cluster formations increases with the strengths and development of the existing operations. As the result of collaboration between indigenous and foreign firms, MNCs and local labor become collaboratorsand creators of new knowledge (Blomstrom and Kokko, 2003).Theco- agglomeration of foreign subsidiaries within a host location develops incrementally over time (Cantwell, 2000). In such cases the accumulation of technological capability in the host location also develops and as a result of aggregation and cumulative agglomeration of economic forces, the cooperation of the foreign firms often develops across industries or in accordance to a particular industrial specialization (Nelson, 1993; Cantwell, Iammarino, and Noonan, 2000). Whether considering agglomerations workforce capacity or its level of skill, foreign firms seek to exploit locational advantages of target regions (Dunning, 2012).In general, the literature does not explore to what extent agglomerations in developing economies can support growth of the host regions and attract workforce from outside to migrate into those same regions. Hence, the question (H1): Will regions with higher rates of workforce and skill availability across Poland be able to attract higher rates of specialized FDI into them? 2.2. Effect of availability of skilled workforce on attraction of foreign subsidiaries in higher-value-added industries Location decisions made by foreign subsidiaries influence spatial sorting of innovative firms and highly-skilled employees; hence, impacting both locales and their own futures. Castellacci (2014) also tests innovation in the service industry and proximity to larger markets. He finds that innovators will have to pay a higher relational distance cost for undertaking expert activities and therefore, they all prefer to avoid or reduce these costs by FDI strategy instead. For such advanced type of activities, skilled workforce needs to be available in the locale to be attractive to foreign investment location consideration. In their empirical study of Central and Eastern European countries Carstensen and Toubal (2003) discovered that low labor costs and skill-specific economic factors are indispensable to achieving the success of investment in the region. Such studies give hope to both FDI location seekers and local policymakers attempting to attract new subsidiaries into their regions. A number of studies of the subject determined that the availability of qualified skill is a positive FDI attraction factor (Little, 1978).Following this, Mariotti and Piscitello (1995), analyzed the quality of labor force using skill and education as measures and found that labor seems to be less decisive variable in attracting foreign direct investment, skilled labor can be increasingly important in attracting foreign direct investment into particular agglomerations. Blomstrom and Kokko (2003) also conclude there are opportunities for significant spillover effect from foreign direct investment into host economies, based on the analysis of FDI, following two different regions and countries. According to the study, FDI inflows creative potential for spillovers of knowledge to the local labor force, the host regions’ level of human capital determine show much FDI it can attract and whether local firms can absorb the potential spillover benefits. In such a scenario, economies with higher levels of human capital and skill, may be able to attract larger amounts of foreign direct investment requiring skilled labor, therefore, further contributing to the development of the skill pool in the host economy. Additionally, the study concludes that the weaker economy may be able to attract only smaller amounts of FDI, and then only benefit local skill development and technological know-how in rather minimal ways. This finding poses an important challenge to the regions across the country as each possesses a particular level of absorptive capacity and ability to attract particular type of FDI relevant to the regions. http://www.iaeme.com/IJM/index.asp 144 editor@iaeme.com
Arkadiusz Mironko Also, regions’ market size as well as the proximity to large markets is needed in order for the participating firms to transition toward higher value-added activities in the agglomeration (Florida, 1995; Ambos, 2005; and Dunning, 1997).Such an upgrade in activity is necessary to develop and maintain a thriving industrial development trajectory.This finding will indicate that co-location of firms should lead to further increased concentration of firms and, also, to a focusing of the local industrial specialization in an agglomeration (Cantwell, 1994; Cantwell, Iammarino, and Noonan, 2000). The presence of the combination of these factors, skill and market size, can prove very attractive to the investing MNCs looking for most fitting locations to establish their subsidiaries in the developing markets. This, however, varies between labor-intensive and skill-intensive industries; hence the following hypothesis (H2) will be tested here: (H2). Whether regions in Poland with higher availability of skilled workforce and overall larger markets attract subsidiaries in industries with higher value-added activities. 2.3. Impact of the regional level of skilled labor and FDI spending on attraction of FDI Above all foreign subsidiaries are viewed as source of investment for modernizing the industrial base of developing countries; often for improving the quality and reliability of infrastructure, including FDI investment. Foreign firms often become sources of innovation activity and funding (Cantwell, 1991). The success of investment activity and spending, however, requires absorptive capacity, hence, above all the availability of skilled workforce in the agglomeration hosting the investment (Lipsey and Kravis, 1985; Blomstrom, 1991). This combination of foreign funding, along with the local absorptive capacity, is necessary for the possibility of successful adaptation of FDI in the regions. The regions where such a combination of investment activity and absorptive capacity are present, represented by level of skilled workforce, should attract future FDI including, potentially innovation activity and funding (Dunning & Narula, 1995). The regions showing a correlation between the presence of skill and foreign investment within them should become, therefore, an attractive location for foreign-owned subsidiary spending in their sectors of industrial specialization (Cantwell, 1991; Cantwell and Janne, 1999).Additionally the data on total foreign investment spending per region will be used here to offer a robustness test for the strength of foreign investment in the regions, and the attraction of FDI private investment in the regions. Therefore, the analysis will test here (H3): Whether the level of skilled workforce, and the level of foreign direct investment in the region, lead to increasing level of foreign firms presence across the regions. An increase in foreign investment in particular industries across regions will be an indication of an increase of the industrial activity in the regions exhibiting such strengths. 2.4. Impact of the workforce access and wage level on location of FDI across regions The studies of the clusters of foreign investment also explore the question, why economic activities of foreign subsidiaries locate in a rather limited number of places? Fujita and This se (1996) address this question by highlighting first, the constraints of the workforce mobility; second, the relatively low costs of transportation; and, third, the size of the urban population, which is an important determinant in the structure of the urban agglomeration economy. The mobility of workforce and its level of skill are important considerations on both local (sub- national) and international levels for MNCs investing abroad (Krugman, 1998). http://www.iaeme.com/IJM/index.asp 145 editor@iaeme.com
The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies In order for the international or external migration of workforce to take place, the region needs to offer an attractive pay (Fujita, et al, 1999), make the growth of a region sustainable, and maintain the attraction towards migration into the region. The wages (or the cost of doing business) are an important element, although, very sensitive in attracting skilled workforce into the region. The high cost of labor in a region can be a deterrent to attracting future foreign investors into that the region. Such an increase in costs are especially harmful to the domestic businesses also seeking skilled human capital (Porter & Van der Linde, 1995). In addition to attractive wages, the region’s employment opportunities also need to offer an attractive living condition to attract skilled workforce and foreign investment into them (Florida, et al, 2011). Hence, we can posit here, that the continuing ability to attract foreign direct investment to the regions with increasing labor costs, is a sign that the cost of running operations of the subsidiaries in the region is not prohibitive, and is allowing foreign investors to benefit from location advantages which they seek. Therefore, the following hypothesis (H4) is proposed here: Do agglomerations richer in overall workforce pool across Poland also tend to exhibit faster growth in wage earnings? This study tests the degree to which foreign companies are attracted to specific agglomerations across Poland based on resource seeking advantages, namely, workforce and skill in those regions. Additionally, this study will provide a better view of whether foreign firms locating in Poland increase demand for skilled labor, and consequently, focus their activities in the areas where foreign investment in Poland is also higher. This contribution will be relevant to the managers investing in Poland and to regional economic development officers attempting to attract foreign investment. Lastly, the results of this study will test foreign firms’ location patterns in Poland as a developing economy and determine whether they follow theoretical and empirical patterns of FDI location in developing nations; hence, also contributing to the literature on the role of clusters and competitive advantages of sub-national regions. 3. DATA AND METHODOLOGY The main focus of this work is to determine the existing patterns of location choice by foreign firms in Poland based on the industrial specialization and the Polish Classification of Activity (PCA).Further, this study will also examine the dominant strengths between these patterns by measuring the relationship between specified economic factors – workforce level, skill availability, market size and the regional industrial specialization of foreign firms; this study will point out specific competitive advantages where industrial clusters of foreign investors are identified as being strong. For this purpose, a set of longitudinal data on location patterns of FDI in Poland to determine the level of clustering of foreign firms in Poland will be used. This data was obtained from a database of the Foreign Investment Department at the Polish Investment and Trade Agency. The data reflects years from 2000 to 2006 for the period before and after Poland’s accession to the European Union. The used data for foreign firms present in Poland shows location determining its geographic participation along with industrial classification and sub- industry classification of activity. To test the proposed questions, the following variables will be used: density of foreign firms in each industry already present in the region; the amount of foreign investment in R&D; cost and availability of skilled workforce; and, size of the local market. Also, data on the size of the regional workforce, availability of skilled labor in each agglomeration, at the secondary and tertiary level, and wage rate will be used. http://www.iaeme.com/IJM/index.asp 146 editor@iaeme.com
Arkadiusz Mironko The following table reflects the aggregate levels of presence of foreign firms across regions in Poland for the selected period. Table 1 Number of foreign firms across regions in Poland Number of Foreign firms by region Voivodship 2000 2001 2002 2003 2004 2005 2006 Dolnośląskie 66 70 79 78 94 92 95 Kujawsko- Pomorskie 21 18 18 20 26 19 24 Łódzkie 47 43 54 49 65 65 68 Lubelskie 15 16 13 13 16 17 16 Lubuskie 15 21 19 20 24 22 22 Małopolskie 35 35 41 38 45 41 42 Mazowieckie 277 328 382 373 411 422 427 Opolskie 16 16 17 18 20 22 22 Podkarpackie 20 25 25 25 28 27 29 Podlaskie 8 7 8 9 11 11 9 Pomorskie 38 38 45 45 51 53 52 Śląskie 60 56 59 74 81 86 89 Świętokrzyskie 13 13 12 12 15 13 13 Warmińsko- Mazurskie 11 10 10 12 13 13 13 Wielkopolskie 92 92 97 94 109 107 107 Zachodnio- pomorskie 17 19 19 23 24 33 31 Number of foreign firms 886 906 978 996 1,101 1,150 1,091 Total viable 751 807 898 903 1,033 1,043 1,059 Firms with incompletedata –135 –99 –80 –93 –68 –107 –32 Source: Based on panel data obtained from Polish Investment and Trade Agency and the author’s own calculation a) Industrial specialization index (RLAis) The data collected and aggregated indicates, as shown above, the level of the presence of foreign firms across regions, to make comparisons between regions’ strengths of individual regions is not reflective of the regions’ relative strengths (Cantwell, 1989, and elsewhere). The relative level of strength can be derived and explained by employing the Revealed Technological Advantage (RTA) index, based on a model first applied by Soete (1987) and further developed by Cantwell (1989, and elsewhere). This model helps to align the results between the heterogeneous regions, without which, a relative comparison of the strengths of regions from the primary data would not reflect relative strengths. For regions with small populations, having even lower levels of actual FDI activity can be very important to their regional economic development. The Regional Industrial Specialization (RLAis) index measure will also allow normalizing the difference between regions with high and low numbers of participants. Soete (1987), following the research of Ergas (1986) that compared growth rates of economies of various size countries using the same method to determine the influence level on small and large countries. Therefore, also following Soete, this research is expected to show small regions as being more specialized than larger regions. http://www.iaeme.com/IJM/index.asp 147 editor@iaeme.com
The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies The data on foreign firms in each industry sector present in each region will be used here in the proposed model to determine regional industrial strengths. The index results will be used as the measure of the level of industrial specialization of the regions. The model adopted from the above-mentioned and presented here, will determine the level of presence of foreign firms across regions in Poland, allowing measuring for industrial concentration of firms among the regions. The Revealed Location Advantage for RLAis will be calculated to reveal the strengths in industrial trajectory in the following way. The RLA index for the foreign firm’s regional industry specialization (is) dependent variable will reflect the level of concentration of foreign firms across regions, using the of data with Polish Classification of Activity (PCA) class attribute for all foreign firms in the data set. For the purposes of analysis, the data will be operationalized as follows: / RLAis = / Equation 1: RLAis – Regional Industrial Specialization index of foreign firms in Poland. To determine the RLA index measure for the Foreign Industry Specialization (RLAis): the number of foreign firms in the industry y in region a in year t, divided by all foreign firms in region a in year t, divided by the number of foreign firms in industry y in all regions in year t divided by all foreign firms in all regions in year t. Further, the level of concentration of foreign subsidiaries in each region in Poland will be analyzed here along with the levels of skilled workforce, labor cost represented by wages, foreign investment spending, and market size of the regions. This analysis will help to determine which locational advantages sought by the foreign investment attract foreign subsidiaries into the regions. Additional data of regional population from the General Statistical Office (GSO), the main statistical office, will be used to explain the relationship between the concentration of foreign investment and the selected variables, workforce, including the industry-specific skilled workforce necessary to facilitate such investment. This will be tested through regression analysis between the proposed variables to answer for the set questions. The amount of foreign investment in R&D, cost and availability of skilled workforce, size of the local market data on size of the regional workforce, availability of skilled labor in each agglomeration, at the secondary and tertiary level, and wage rate will be used here to test for the proposed hypotheses. The labor and skilled labor will be the main focus of the analysis as they are often elusive resources which foreign firms seek.Also, data analysis results will be tested by regression models to determine correlation coefficients between paired and multiple variables. The heterogeneity of the region’s attractiveness to foreign investors will be examined and compared here using the statistical data related to foreign investors and regions within Poland. Further, analysis of the data will be conducted by using the multiple regression method between RLAis index for each industry present in each of the regions. This result will show the relationship between the selected variables and index measure data for each industry across the study period, revealing the correlation coefficients for each of the industries present in the regions. Finally, an analysis of the regional industrial specialization of FDI in the regions related to foreign investment spending will be used to examine the level of presence and strength of the relationship of foreign firms’ industrial specialization and foreign investment. For this control variable the RLAis index in the regions with the availability of skilled labor is used to test the relationship between the variables. This test confirms the results of the total skilled labor test. This analysis will help answer the proposed hypothesis and determine the level of impact the set variables have on the attraction of foreign direct investment activity into regions of the developing economy of Poland and determine their competitiveness. Also, industrial http://www.iaeme.com/IJM/index.asp 148 editor@iaeme.com
Arkadiusz Mironko specialization of economic activity will be revealed from the analyzed data, determining whether the level of availability of the skilled labor in the regions has an impact of attraction of higher value-added activity. 4. RESULTS AND DISCUSSION The main goal of this research is to test the extent to which the location patterns of foreign direct investment (FDI) across regions in Poland are based on the human capital and technical skill availability, among other factors, across regions. The expectation of this study is to determine whether the level of collocation of foreign firms in Poland is influenced by the availability of the skilled labor and overall workforce presence in the regions. If this is confirmed, the data should also show if Polish regions with higher availability of skilled workforce attract more knowledge-intensive FDI. Also, we should be able to see whether agglomerations richer in the skilled workforce, also tend to exhibit faster growth in wage earnings. The results of the analysis presented here demonstrate that for many industries, workforce and skill availability impact patterns of FDI attraction into Polish regions. The data measuring the availability of workforce uses data related to the number of people unemployed per region, including the skilled workforce variable of people educated in the tertiary, college level of academic institutions –Appendix 1, and the RLA is index yields the following results for the selected industries. Correlations between RLAis index and selected variables, reveal the dependence of the location decision-makers of foreign subsidiaries on local economic factors. The results of the analysis of the variables representing regional economic factors (often sought by foreign investors) tested here by regression analysis, reveal the preference of labor availability by foreign firms in manufacturing industries across regions. Also, there is convincing evidence that for higher value-added manufacturing sectors and service sectors skilled labor is a determining element in the select regions. Which, in itself, is not surprising and consistent with previous studies. This finding is interesting in the revelation that more regions continue to attract higher value-added FDI. This study shows micro-level analysis revealing strengths and weaknesses of the selected economic factors. The data used to measure the availability of a skilled workforce, including the skilled workforce variable including those educated in technical and secondary institutions, shows that the regions with previously existing industrial specializations seem to reveal a strong relationship between the skilled workforce and RLA is index. Here the regions with higher levels of the available skilled workforce seem to have a stronger relationship between the variables in the service-oriented industries. This is an indication that availability of skilled labor has an impact on attracting specialized class investors and service-oriented investors into the regions with a higher level of skilled labor. This finding supports the earlier conclusions by Soete (1987) and the proposed hypothesis raised here, making it relevant to the regions within developing economy. The data measuring the degree of correlation between the availability of labor force and RLAis for the participating industries – including the skilled workforce variable of educated in technical and secondary institutions presented as a control variable – show that regions with historically strong industrial specializations, such as Malopolskie and Łódzkie, seem to have strong relationships between the tested variables. The regions with a larger available skilled workforce seem to have a stronger relationship between the control variables in service-oriented industries. This would be an indication that the availability of skilled labor has a positive impact on attracting a specialized class of investors, including service-oriented investors and technical oriented industries, such as, airplane component manufacturing in Podkarpackie. The analysis http://www.iaeme.com/IJM/index.asp 149 editor@iaeme.com
The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies of the level of FDI in regions with the availability of skilled labor per industry used to test the dependency between the variables follows the results of the study by Mariotti and Piscitello (1995), who analyzed the labor force using the skill and education level as its measure. To measure the impact of labor cost on the attraction of foreign firms into the regions within Poland, regional wage level as a percentage of the national average is used. This measure helps to determine the relationship between the level of presence of foreign investors in the regions and regions’ labor cost - Appendix 2.The results of the regression between RLA is index of participating industries and wage level for each region reveal that the labor cost does not have an impact on economic activity in Mazowieckie, the region with the highest degree of FDI. Additionally, the regions showing a strong industrial specialization also tend to attract foreign investors into them despite higher labor costs. While remaining regions do have slower growth in wages and are able to attract FDI into them (albeit at a slower rate than the regions with higher FDI levels),other factors may be relevant here; existing knowledge, expertise or just lower cost of production that attract foreign firms into the regions with lower wages. The result of multiple regression correlating market size, represented by regional population,(Appendix 3), and the level of industrial specialization of foreign firms in the regions test the effect of market strength on FDI. The results of the regression analysis show a relatively high relationship between the variables at 0.05 level. The industries dependent on local markets positioned near them requiring specialized skills, tend to have a lower correlation coefficient in the majority of regions, indicating their focus on skill and production rather than on market access. This finding is interesting and consistent with that of Mariotti and Piscitello (1995) indicating that skill level in select regions attract skilled labor seeking FDI into them. The finding also supports the test for the agglomerations with the relatively higher level of presence of skilled workforce which attract foreign firms in the industries seeking specialized skill capacity in the host regions. The results of regression between RLAis and foreign investment level reveals that FDI investment level in the regions positively impacts industrial specialization of industries (Appendix 4). The coefficient of the amount of regional spending and concentration of foreign investment across regions in Poland shows a strong correlation in some industries across regions, such as: foreign investment in the manufacture of chemicals and chemical products in only two participating regions (Podkarpackie, at 0.835, and Lubuskie, at 0.677); and foreign investment in the manufacture of pharmaceuticals has a relatively strong and positive relationship in all participating regions. Finally, foreign investment and industrial specialization variables in a number of manufacturing industries show a strong correlation across regions. Although for a number of industries in specialized regions the foreign investment level and RL Ais correlation may be an indication of process improvement orientation offered by the foreign investment in the region. The regions’ industrial specialization in some service sectors as retail and construction have a much lower relationship between the two variables, notably in Mazowieckie, the largest market. This finding suggests the opposite – not following previous studies outcome – indicating a strong relationship between market size and service, and knowledge-intensive industries. This finding is interesting and suggests that other economic forces are at play in the region. The study by Brülhart (1998) which explored location of manufacturing in the European Union reveals a strong concentration of Europe’s economic core along with a heavy concentration of high-tech industries. The less skill-intensive and more labor-intensive industries, however, were dispersed around the periphery of the European Union. These findings are mostly confirmed in the analysis presented here with few exceptions. The Western regions, close to Germany and other Western European and Scandinavian, economies show the http://www.iaeme.com/IJM/index.asp 150 editor@iaeme.com
Arkadiusz Mironko impact of labor availability in select industries. Also, Podkarpackie region specialized in manufacturing of transport equipment with a particular focus on the aircraft manufacturing, a subsection of manufacturing of transport equipment, shows a narrowing specialization of the region for the studied period. Further examination of economic factors to determine which support and attract particular types of FDI into the regions and which have no attraction effect provides us with the following conclusions. The analysis between the measure of availability of skilled labor with a tertiary level of education and the amount of foreign investment across regions offers meaningful insights into the relationship which is strong and maintains increasing strength during the period. This finding is indicative that foreign investors are attracted by the availability of the skilled workforce available across peripheral regions. Wage levels also correlate strongly with foreign investment levels, which can be a sign of success – however, that dependence can also pose a risk should skilled labor cost become a deterrent, leading foreign investors to seek other host locations, which was the case in Spain and Ireland in the period after they joined the EU (Barry and Bradley, 1997; De Mello Jr, 1997). The data on total foreign investment spending per region used here to test for the strength of regional investment level and attraction of FDI into them indicate that the foreign investment level follows the same trajectory as total investment across the regions offering additional level of strength to the questions posed here. 5. CONCLUSIONS This study introduces the idea of the impact of skill and workforce availability in regions within developing economies as a driver of FDI attraction into the regions exhibiting such strengths. The analysis of the data on location patterns in real terms before applying the RLAis index shows a southwestern trajectory of the concentration of foreign firms related proximately to the exogenous – Western European – markets. The only geographical exception is Mazowieckie, the capitol region with the city of Warsaw, in the east-central part of the country, which despite higher labor cost has the advantage of infrastructure, strong technical and academic institutions, regulatory and financial institutions. This finding also follows that of Campos and Kinoshita’s (2006), which indicate that workforce size and skill, population, and size of the internal market of a region are the drivers behind the motivation to locate there. There are also a number of small but specialized regions on the periphery revealed as narrowing their industrial specialization - Podkarpackie. This study supports the importance of the presence of skilled workforce in the regions within developing economies in order to begin a transition from manufacturing to service- related economic activity. Foreign subsidiaries provide technology and know-how, while as many previous studies conclude that absorptive capacity in the form of skilled labor is necessary for successful operations at the service related industries (Berman, et al, 1994; Porter, M. 1995; Miles, I. 2008). Moreover, this finding is very interesting consideringdespite the high cost of the skilled workforce, the regions are able to provide the workforce level necessary. This potentially is done through internal migration of skill into those regions – this can be a question to explore further at the European Union’s eastern openness, will continue in the future, however distant. That openness should remain a significant motivating factor to regional and national policymakers in Poland as well. The eastern regions can serve as a springboard for MNCs to serve developing markets east of Poland. The regions along the western border of Poland (Dolnośląskie, Lubuskie, and Zachodnio-Pomorskie) also have a much lower degree of foreign investment activity. However, they seem to show an increasing degree of specialization and attractiveness for foreign investors, driven by availability of skill (also based on historical industrial presence), in the regions studied here. For the peripheral regions in Poland, both in http://www.iaeme.com/IJM/index.asp 151 editor@iaeme.com
The Impact of Human Capital and Skill Availability On Attraction of Foreign Direct Investment (FDI) Into Regions within Developing Economies the Eastern and Western part of the country, opportunities seem to be plentiful due to the availability of skilled workforce and lower overall costs, including wages. These opportunities are narrowing along the trajectory of industrial specialization of the regions. This specialization effect and its strong correlation to the regional availability of skilled labor is especially evident in the years immediately post the EU accession by Poland. Further study in this area can consider in more depth the impact of indigenous labor and skill availability on supporting foreign investment activity across regions in Poland. This study has also not considered changes in productivity which, can be a subject of future research in this area as well. BIBLIOGRAPHY [1] Ambos, B. (2005). “Foreign direct investment in industrial research and development: a study of German MNCs.” Research Policy, Vol. 34, No. 4: 395–410. [2] Barrios, S., Görg, H., & Strobl, E. (2006). Multinationals' location choice, agglomeration economies, and public incentives. International Regional Science Review, 29(1), 81-107. [3] Barry, F., & Bradley, J. (1997). FDI and trade: the Irish host‐country experience. The Economic Journal, 107(445), 1798-1811. [4] Bell, M., & Pavitt, K. (1995). The development of technological capabilities. Trade, technology and international competitiveness, 22(4831), 69-101. [5] Berman, E., Bound, J., & Griliches, Z. (1994). Changes in the demand for skilled labor within US manufacturing: evidence from the annual survey of manufactures. The Quarterly Journal of Economics, 109(2), 367-397. [6] Birkinshaw, J. (1997). Entrepreneurship in multinational corporations: The characteristics of subsidiary initiatives. Strategic management journal, 207-229. [7] Birkinshaw, J. and Hood, N. (1998). “Multinational subsidiary evolution: Capability and charter change in foreign-owned subsidiary companies.” The Academy of Management Review Vol. 23, No. 4: 773–795. [8] Blomstrom, M. (1991). “Host country benefits of foreign investment.” NBER Working Paper No. W3615 (February), Available at SSRN: http://ssrn.com/ abstract=268197. [9] Blomstrom, M., & Kokko, A. (2003). The economics of foreign direct investment incentives (No. w9489). National Bureau of Economic Research. [10] Brülhart, M. (1998). Economic geography, industry location and trade: the evidence. The World Economy, 21(6), 775-801. [11] Campos, N. and Kinoshita, Y. (2003). “Why does FDI go where it goes? New evidence from the transition economies.” IMF Working Paper. [12] Cantwell, J. A. (1989). Technological innovation and multinational corporations. Cambridge, MA: B. Blackwell. [13] Cantwell, J. A. (1991). “The theory of technological competence and its application to international production,” in D. McFetridge (ed.), Foreign Investment, Technology and Economic Growth. Calgary: University of Calgary Press. [14] Cantwell, J. A. (ed.) (1994). Transnational Corporations and Innovatory Activities. United Nations Library on Transnational Corporations. London: Routledge. [15] Cantwell, J. A. (2000). “Technological lock-in of large firms since the interwar period.” [16] European Review of Economic History, Vol. 4: 147–174. [17] Cantwell, J. A., Iammarino, S., and Noonan, C. A. (2000). “Sticky places in slippery space – the location of innovation by MNCs in the European regions,” in N. Pain (ed.), Inward Investment, Technological Change and Growth: The impact of MNCs on the UK economy. Oxford: Pergamon, 210–239. http://www.iaeme.com/IJM/index.asp 152 editor@iaeme.com
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