Gravity,education, and economic development in a multinational affiliate location

This paper investigates the relationship between education and the location of multinational affiliates. It finds that US multinationals seek production locations with high levels of education rather than with uneducated labour. Furthermore, the education effect can be separated from the effects of overall economic development. Based on these results, the paper suggests why previous results regarding education and multinational affiliate location have been mixed. Using a gravity equation framework, the analysis also introduces a methodological innovation by including numerous economies that receive no investment. The expanded data set reveals that about two-thirds of the variation in multinational location can be explained by the standard gravity variables of host country size, transport costs, distance from the investing country, and host country remoteness. Furthermore, the elasticities are higher than those resulting from the analysis of the more restricted country samples used in nearly all research on multinationals. This suggests that previous research might have missed or underestimated relationships and may not be useful in understanding why some countries receive little or no multinational investment.