This week’s NEP Development listserv had an interesting new working paper by Amelie F. Constant and Bienvenue N. Tien on whether an African leader’s foreign education means that his country receives more FDI:
“Leaders are critical to a country’s success. They can influence domestic policy via specific measures that they enforce, and they can also influence international public opinion towards their country. Foreign Direct Investments are also essential for a country’s economic growth. Our hypothesis is that foreign-educated leaders attract more FDI to their country. Our rationale is that education obtained abroad encompasses a whole slew of factors that can make a difference in FDI flows when this foreign-educated individual becomes a leader. We test this hypothesis empirically with a unique dataset that we constructed from several sources, including the Library of Congress and the World Bank. Our analysis of 40 African countries employs the robust technique of conditional quantile regression. Our results reveal that foreign education is a significant determinant of FDI inflows, beyond other standard characteristics. While intuitive, this result does not necessarily indicate sheepskin effects or superior human capital obtained abroad. Rather, it indicates the powerful role of the social capital, networks, and connections that these leaders built while they were abroad that they in turn mobilize and utilize when they become leaders.”
The authors’ main finding is interesting, but I wonder whether it would have been possible for them to use country fixed effects, since their data consists of several countries over time for a total of 531 country-year observations. There has to be some within-country variation in whether the leader was educated abroad.
The reason why it would be interesting to hold country-specific characteristics constant is that for example, it is likely that a former French colony has a greater likelihood of having a leader educated in France, but also of receiving a higher share of FDI from France.
Likewise, given that the authors pooled their data into a cross-section, it would have been interesting to see a discussion of the endogeneity of a foreign leader’s education to FDI. The more FDI a country receives, the more its population is exposed to foreign influence, and the more likely it is for its citizens to study abroad.
It’s difficult to tell whether the relationship identified by the authors is causal, but I believe this is an example of an interesting research question relying on less-than-ideal identification.