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This study examines the effect of horizontal and vertical foreign direct investment (FDI) linkages on the investment decisions of domestic plants. It explores this link for plants in a developing country, where the dynamics of FDI spillovers on domestic investment choices are distinct from those in developed countries. It also adds to the literature by examining the role the absorptive capacity of plants plays in this nexus, enriching our understanding of the interaction between FDI and the investment choices of domestic plants and providing insights for policymakers and managers seeking to maximize the positive effects of FDI spillovers.

This study specifies the dynamic investment equation using the Euler and Q models. This equation is estimated using the first-difference and system generalized method of moments GMM estimators, which allow us to address persistency, endogeneity and unobserved plant-specific effects. FDI exposure proxy, calculated by weighing the FDI engagement variable by firm size, captures the strength of foreign equity participation in an industry and time. Input–output (IO) tables are used to calculate the proxies for horizontal and vertical (backward and forward) FDI. Total factor productivity is calculated using a method advocated by Olley and Pakes (1996) that allows us to control for selection and simultaneity.

We find that FDI inflows into both the domestic plants’ own industry and the input-supplying industry significantly boost the capital accumulation of the average domestic plants. Differentiating plants based on their absorptive capacities reveals that the presence of foreign firms significantly increases capital deepening for domestic plants with high absorptive capacity within their own industry (horizontal linkage) and in industries that supply inputs to the FDI-exposed industry (backward linkage). However, it leads to a decrease in capital deepening for high absorptive capacity domestic plants in industries using inputs produced by the industry exposed to FDI (forward linkage).

These findings have implications for policymakers and managers who aim to design incentives to maximize the positive spillover effect of horizontal and vertical FDI linkages on the capital deepening of domestic plants. Exploring additional mechanisms that could play a role in this nexus, separately for plants in different industries (such as the industries in which the country has a comparative advantage), may be fruitful.

To our knowledge, the relationship between the investment behavior of the domestic plants and FDI linkages has not been examined for a developing country. It is useful to explore this link in developing countries, as the investment choices of plants in these nations may be impacted differently by FDI spillovers than those in advanced nations. This study further contributes to the literature by investigating whether the plants’ absorptive capacity affects the nexus between FDI linkages and investment decisions of the domestic plants. The findings are valuable for policymakers and managers who aim to increase plants’ capital accumulation in developing countries.

This paper aims to understand the differing impacts of wealth distribution on human capital accumulation and skilled-unskilled labour generation under three educational paradigms as follows: private, public and a system of mixed education.

The authors use an overlapping generations model.

The wealth dynamics show that both in the private education system and public education system, there are two possible outcomes- stagnation and steady growth depending on the efficiency of the education system, skill premium and other parameters. The choice of the education system through voting is discussed. It is found that skilled workers would always vote for private education whilst unskilled workers vote for private education if public education expenditure of the economy is low.

The study is subject to several limitations. This paper considers the rate of interest and wage rate to be exogenously given, and thus ignores the general equilibrium effects. The authors do not consider the labour-leisure choice. The introduction of labour leisure choice in the model would alter many of the results. The authors do not consider heterogeneous ability across individuals. The analysis of the differential efficiency of the different education systems needs further, rigorous research. Also, this paper does not consider other occupations such as entrepreneurship and self-employment. This paper considers the labour demand function to be perfectly elastic, and hence, does not consider any demand constraint. What happens if bequests are taxed? What happens if parents are not altruistic? These questions may be addressed in future research.

If the proportion of tax paying skilled labour is low in any country, pure public education may not be able to generate sustained human capital growth. For countries with a sufficiently large proportion of skilled labour, the public education system would be successful. On the other hand, if skill premium is low or the education system is poorly managed private education system may fail too.

Whilst investigating the effects of public vs private education on growth and development in the presence of unequal wealth distribution, The authors have tried to address a few questions. First, why the public education system has been successful in skill accumulation in developed countries whilst it has failed to do so in less developed countries? Second, why do some countries with mostly privately run educational institutions perform much better in human capital production whilst others do not? Third, in an economy with unequal wealth distribution, what are the factors that result in public or private education as a voting equilibrium outcome?