Arya Bhat

The Effects of Onshoring on Human Capital Accumulation

Started Jan. 5, 2024

Abstract or project description

This paper studies the impacts of increased onshoring (offshoring from the host country perspective) practices on economic growth through the lens of education, or human capital accumulation. Multinational onshoring investment in developing countries creates an initial labor demand shock in unskilled and/or skilled labor. The skilled demand shocks increase skilled wages, leading to an education demand shock. The shock increases the education levels of households, increasing human capital accumulation more than the normal rate. Since human capital accumulation is well-linked to increased economic growth, host countries benefit from increased economic growth. Although existing literature analyzes the variables plotted in the paper, this specific channel has not been studied. The paper starts with a theoretical model that examines the effect of introducing an onshoring firm on a one-household nation’s temporal choices between education, labor, and leisure. I find that household utility, leisure, and net educational investment increase to a steady state value, and the increased net investment increases the human capital stock, leading to household economic growth. In the paper’s empirical section, I plot foreign direct investment (FDI) as a percentage of GDP against the education index in a 32-year panel of 11 developing countries (common targets of onshoring firms). The regressions measure how growth rates of educational attainment (human capital accumulation) change with respect to a spike in the growth rate of onshoring investment. Statistically, I found a significant positive correlation between growth rates in FDI/GDP and the education index growth rate in all regressions analyzed, indicating validity.