Better Health Increases Foreign Direct Investment

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Among a restricted sample of low- and middle-income countries, a one-year higher life expectancy results in a 9 percent increase in gross FDI inflows.

Foreign direct investment (FDI) is increasingly viewed as a way to reduce poverty and spur economic growth among developing countries. It provides not only employment and financial capital, but also a means of transferring technology and skills, and increasing access to global markets. Yet poorer countries are relatively less successful at attracting FDI than their wealthier counterparts. This observation, coupled with the disparate health indicators between industrial and developing countries, prompted Marcella Alsan, David Bloom, and David Canning to investigate The Effect of Population Health on Foreign Direct Investment (NBER Working Paper No. 10596). The authors analyze data from 74 countries, industrial and developing, over 1980 to 2000, to determine whether health influences FDI flows. They find that good population health -- measured by average life expectancy -- has the extra merit of attracting more FDI.

Health, the authors note, is an integral component of human capital that enhances economic performance and productivity for the individual and thereby for the nation as a whole. Healthy workers are generally more physically and mentally robust than those afflicted with disease or disability. They are less likely to be absent from work because of personal or household illness. Healthier children tend to learn more easily and are less likely to be absent from school. Thus, they become better educated, higher earning adults. Healthier workers, with lower rates of absenteeism and longer life expectancies, acquire more job experience.

Foreign investors, apparently recognizing the merits of good health and its positive impact on potential workers, sink more money into new plant and equipment in countries with relatively good health standards. In addition to seeing the impact of good health on worker productivity, foreign investors may shun areas where disease is rampant and where access to health care is limited, out of fear of endangering their own health and that of expatriate staff. One recent example of how disease, or even the fear of disease, can dampen investment is shown with the outbreak in China of Severe Acute Respiratory Syndrome (SARS). FDI inflows into mainland China declined by US$2.7 billion during 2003 and FDI into Hong Kong declined by 62 percent for one quarter. These trends were quickly reversed once the outbreak was controlled. But, the authors write, lengthier epidemics, such as HIV/AIDS or malaria, could have severe, long-term effects on FDI.

To reach the conclusion that health affects FDI inflows, the authors attempt to sort out health from other factors that are likely to influence foreign investors. These factors include openness of the economy, infrastructure, geography, quality of governance, education level, population, and GDP per capita. The authors find that life expectancy ranks second only to GDP per capita in its level of correlation with the inflow of gross FDI. Over the full sample of 74 countries (rich and poor), one additional year of life expectancy increases FDI inflows by about 7 percent. Moreover, among a restricted sample of low- and middle-income countries, a one-year higher life expectancy results in a 9 percent increase in gross FDI inflows. These results could be of special interest to developing countries where attracting FDI is a higher priority because of their low savings rate and income levels.

-- David R. Francis