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Economic Complexity, Human Capital, and FDI Attraction: A Cross Country Analysis ,

Pegah Sadeghi, Hamid Shahrestani, Kambiz Hojabr Kiani, Taghi Torabi

PII: S2110-7017(20)30264-X
DOI: https://doi.org/10.1016/j.inteco.2020.08.005
Reference: INTECO 263

To appear in: International Economics

Received Date: 15 December 2019

Revised Date: 30 May 2020
Accepted Date: 26 August 2020

Please cite this article as: Sadeghi, P., Shahrestani, H., Kiani, K.H., Torabi, T., Economic Complexity,
Human Capital, and FDI Attraction: A Cross Country Analysis ,, International Economics, https://
doi.org/10.1016/j.inteco.2020.08.005.

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 Economic Complexity, Human Capital, and FDI Attraction: A Cross Country Analysis

Pegah Sadeghi 1, *, Hamid Shahrestani1, Kambiz Hojabr Kiani1, Taghi Torabi1

1- Department of Economic, Science and Research branch, Islamic Azad University, Tehran, Iran.

*Corresponding Author: pegahsadeghi64@gmail.com

Abstract
Foreign direct investment (FDI) inflows dynamics indicates that its new wave is efficiency-

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seeking and, thus, the recent literature emphasizes on the host countries’ knowledge role and

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productive capabilities. This paper holds forth the new factor of economic complexity, which is
an indicator of national productive capabilities and knowledge. To this end, two proxies are used
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to measure the countries’ economic complexity including economic complexity index (ECI) and
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economic sophistication (EXPY). The results indicate that economic complexity is one of the
main determinants of FDI inflow with statistically and economically robust positive effects on
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FDI inflows to host countries. Furthermore, results explain why countries with equal human
capital endowment have different performances in FDI attraction.
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Keywords: Economic Complexity, Economic sophistication; FDI; Human Capital.

JEL Classification: F16; F21; F40; C23.
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1. Introduction
FDI, as a key element of globalization, is a collection of capital, technology, management, and
entrepreneurship, which allows a source country’s investors to produce goods and services in
somewhere else (Farrell, 2008). As noted by Smith (1997), FDI fill development gaps between
developing and developed nations by providing physical capital for domestic investment
projects, preparing foreign currency through initial investment and subsequent export earnings
and, finally, generating tax revenues through additional economic activities. According to Freund
and Pierola (2015), the top 1% of exporters, namely “export superstars” create RCA in most
countries and most these export superstars are multinational corporations (MNCs). Accordingly,

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attracting FDI is the first agenda for most developing countries, and experts and policymakers

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have been interested in exploring the main factors that establish a country’s level of FDI
attractiveness. -p
FDI attraction depends on the country’s valuable resources and capabilities. The conventional
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view about a host country’s ability to attract FDI puts emphasis on demand factors (e.g. host
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country’s income and market size), and non-market factors (e.g. resources abundance). In the
modern approach, other determinants of economy’s capability, e.g. human capital, knowledge
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stock, financial depth, and institutions, have been considered (Asiedu, 2002).1 As noted by
Noorbakhsh and Paloni (2002, pp. 1594–1595), FDI sectoral composition changes have altered
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their location determinants’ relative importance. Until 1950s, FDI was resource-seeking. As a
result, countries with natural resource abundant were the best countries for foreign investing.
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During the 1960s, the importance of market size as the determinant of FDI’s geographical
distribution increased. Since 1980s that FDI flowed into services and technology-intensive
manufacturing, the importance of traditional determinants, e.g. natural resources, low-cost labor,
and national market size declined, while access to created assets (e.g. skills and technology),
institutions, and trade agreements became critical. For example, among African countries,
Mauritania successfully attracted FDI due to its skilled low-cost labor, preferential access to the
European Union and United States markets, and a sound legal system for dispute settlement
(UNCTAD, 1998). In fact, the recent wave of FDI is efficiency–seeking, which requires a
distinct collection of inputs, such as highly–skilled labor and technology rather than natural
resources endowments or low-cost labor. Thus, countries with more stock of human capital and

1
. Other factors are labor costs, exchange rates, inflation rate, taxes, etc.

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knowledge will be more successful in attracting the efficiency-seeking type of FDI (Cleeve et. al,
2015). Moreover, as emphasized by Blomstrom and Kokko (2002), and Borensztein, Gregorio,
and Lee (1998), MNCs can sell capital goods in the host country at lower costs, because a major
part of research and development activities in the world is carried out by them. Yet, the human
capital level establishes the sufficient implementation of such advanced technologies in the host
countries. In other words, the human capital level in the host country establishes that how much
and which type of FDI can be attracted. The countries with high levels of human capital and
productive capabilities may attract large amounts of technology intensive foreign MNCs, while
foreign firms with simpler technology are attracted to the countries with low levels of human

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capital and productive capabilities.

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The productive capabilities or the embedded knowledge in the productive structure an economy
are investigated in the economic complexity theory. According to the literature on location’s
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complexity, a country’s economic complexity depends on the complexity of the products it
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exports, and their value share in its export basket. Diversity of complex products in the export
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basket, or in other words, specialization’s pattern of a country, is established by its capabilities

including tangible inputs, e.g. ports, roads, and buildings as well as intangibles inputs, e.g. skills
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and knowledge, norms, and institutions. As a fact, rich countries export more complex products
that appear to have more growth promoting effects. In contrast, poor countries due to their weak
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capabilities especially in the intangible inputs export simple or less complex products.
Hidalgo and Hausmann (2009) and Hausmann and Hidalgo (2010) provided a measure of the
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relative knowledge intensity of an economy, namely economic complexity index (ECI). ECI
establishes a country’s productive structure. Economic complexity takes simultaneously into
account the export diversity of a country (the number of products it exports) and its product
ubiquity (the number of countries that export that product) (Hidalgo and Hausmann, 2009).
According to Hartmann et al. (2017), in order to produce and export a lot of ubiquitous products,
a country requires a large amount of distributed productive capabilities. Distribution of
knowledge mostly depend on people’s ability to form social professional networks. In other
words, countries with high social capital and health institutions can achieve success. Thus, ECI,
on the one hand, measures the knowledge intensity, laborers’ skill, and quality of human capital
and, on the other hand, implicitly indicates the quality of social infrastructures and institutions.

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Moreover, recent studies, e.g. Ferrarini and Scaramozzino (2016), demonstrate that economic
complexity can affect the human capital performance.1 Honduras, India, and Nicaragua are the
instances. Inward FDI to India was 27 and 31 billion $ in 2010 and 2015, respectively, and of
two others was about 1 billion $. Yet, the average years of education in 2010 were 6, 6.1, and 6.3
years, and in 2015 were 6.4, 6.6, and 6.7 years, respectively.2 As can be seen, the difference in
inward FDI is not at all proportional to the human capital level of countries, but is related to
quality and performance of human capital.
This paper is to examine whether the economic complexity helps for FDI attraction or not. Due
to the effects of economic complexity on human capital performance and economic growth, we

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expect countries with high level of economic complexity to prepare productive knowledge and

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capabilities for attracting FDI and internalizing its effects. To the best of our knowledge, no
empirical research has ever been studied the subject matter, and this is the first time that the
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economic complexity is considered as a potential determinant of FDI attracting.
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The remainder of this paper is organized as follows. Section 2 briefly reviews the methodology.
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The data and model are discussed in Section 3, and the empirical results are presented in Section
4. Finally, Section 5 concludes the paper.
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2. The Measurement Method of ECI

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As discussed in the previous section, this paper studies the effect of economic complexity on
attracting FDI. In this section, we review the recent literature on calculation of ECI. In order to
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measure the product complexity and economic complexity, Hausmann et al. (2007) proposed the
product sophistication index (PRODY3), and the economy sophistication index (EXPY1).

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. Moreover, the scholars included ECI in the growth equation, and found that the complexity promotion could
significantly prompt the economic growth, and the differences in income were the result of complexity differences
(e.g. Hidalgo and Hausmann, 2009; Felipe et al., 2012; Ourens, 2013; Poncet and Starosta de Waldemar, 2013;
Felipe et al., 2014; Zhu and Li, 2016).
2
. In the empirical studies, researchers studied the effect of labor skill and knowledge stock of host countries on FDI
attraction using various proxies, most which are related to the human capital characteristics, e.g. mean years of
education, labor/population with secondary/tertiary education, secondary school enrollment, the number of
individuals in research, the private sector development, and adults’ literacy rate. There are some shortcomings in the
proxies. For example, most of them relates to the number of educating years; while it is not revealed that whether
the knowledge gained in one year of education in a country equals to that obtained in another country or not.
Moreover, it is presumed that the knowledge is achieved only by education, while other training sources are ignored.
3
. PRODY is denoted by the following equation:

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PRODY is the weighted average of the real per capita GDP of all countries that export the
product. Accordingly, a higher value of PRODY for product s1 than product s2 indicates that
product s1 is more complex than product s2. EXPY is the weighted average of the PRODY of
export basket of the host country. The higher is the value of EXPY for a country, the more
sophisticated is the country. According to Hidalgo and Hausmann (2009), ‘rich countries export
rich country products’. Hence, they have improved the indices by separating the information on
income, from the information on the network structure of countries and the products they export.
In the new approach, product and country complexity are considered simultaneously. If country
A has more diverse products than country B (for example, country A exports more products than

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country B), country A likely has more capabilities than country B. So the economy of country A

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is more complex than country B. If product s1 is exported by fewer countries with RCA than
product s2 (for example, product s1 is less ubiquitous than product s2), product s1 requires more
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exclusive capabilities than product s2 and, thus, it is more complex than product s2. To obtain the
product and country complexity indices, we assume that we have a world with N countries and
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N products. Based on RCA index, matrix M is defined as follows2:
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1 if RCAij ≥ 1
Mij = IRCAij ≥ 1 = (1)
0 if RCAij < 1
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RCA
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PRODY = GDP
RCA
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Where i and j are good and country, respectively. RCA is the revealed comparative advantage and is defined as

'%&
following:
* )
(% '%&
"#$%& =
∑, '%
% *∑ ∑ '
% & %&

Where '%& is export product i by country j. GDP represents the real GDP per capita of the country j
1

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. EXPY is denoted by the following equation:
X
EXPY = PRODY
∑/ X
Where P is the number of goods in the export basket of the country j, and X is the product I’s export value.

2.To more details about economic complexity index, please see the webpage of Observatory of Economic
Complexity (OEC) and Hausmann and Hidalgo (2011).

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Where i is the ith product, and j is the jth country. The entries in the M are equal to 1 if country j
exports product i with a RCA higher than (or equal to) 1, and 0 otherwise. To calculate the
export basket’s diversification of countries and ubiquity of products, we obtain the elements of
matrix M by columns and rows, respectively:
N

Country diversification: dj = Mij (2)

=1

Product ubequity: ui = M (3)

=1

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A more complex-economy country has more productive capabilities and less ubiquitous

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products, and appears to require more exclusive capabilities. Economic complexity/product
complexity is associated with capabilities that are available to an economy (the set of capabilities
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required by a product). Thus, there is interdependence between economic complexity and
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product complexity. The complexity of a country’s economy depends on the complexity of the
product it exports, and the complexity of a product depends on the economic complexity of
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countries that produce it. Based on the premise, Hidalgo and Hausmann (2009) propose linear
recapitulation ‘method of reflections’. In this method, the economic complexity and product
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complexity indices in any recapitulation are obtained through the weighted average value:

E 1
K

F# ,H = J FL,H−1
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C
C I
(4)
=1
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D
1
K

C
CFL,H = J F# ,H−1
B N
=1

F# ,H and FL,H are the economic complexity of country j in nth recapitulation and product
complexity of goods i in nth iteration. The starting values for F# ,H−1 and FL,H−1 are N and I ,
respectively. By inserting the Equation 2 into the Equation 1, one can obtain F# ,H as a linear
transformation of F# ,H−2 as follows:

1 1
K K

F# ,H = J J F# ,H−2 (5)
I N
=1 =1

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In matrix form, this linear map can be written so that the transpose of an ergodic Markov
transition operator converges to the same constant with the speed of convergence proportional to
the second largest right eigenvalue.
QQQQQR
F# = S , QQQQQR
F# ′ (6)
QQQQQR is a limit of recapitulation as follows:
Where vector F#
QQQQQR
F# = lim F# ,H (7)
H→∞

Hidalgo and Hausmann (2009) established the economic complexity measure as the second
largest eigenvectors of the matrix S , :

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′

JJ
K

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S, = (8)
IN
′

=1
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ECI of country j (\#] ) is defined as the normalized value of economic complexity measure as
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follows:
QQQQQR QQQQQR _
F# − ^F#
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\#] = (9)
QQQQQR )
`aIbc(F#
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QQQQQR is the second largest eigenvectors of the matrix S , , ^F#

Where F# QQQQQR _ is the mean of QQQQQR
F# , and
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QQQQQR ) is the standard deviation of QQQQQR

`aIbc(F# F# 1.
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1 . As noted by an anonymous referee, ECI/EXPY is constructed by RCA index calculated using export data.
Although export value reflects exporter’s production capabilities to a certain extent, export value also includes
values which are produced in the third countries. In other words, export value is decomposed into imported value
which is produced in other countries and value added which is produced in the exporting country. Thus, ECI/EXPY
reflects not only exporter’s production capabilities but also production capabilities of other countries in the global
value chains. Therefore, ECI/EXPY should be constructed by RCA index by using export data in value-added.
Despite this shortcomings, using the I-O table to compute the ECI index have to difficulties. First, the international
I-O Tables prepare the results for aggregate classifications of products (e.g. ISIC 2 digit) while the export data are
prepared at HS 4/6 digits and or SITC 4/5 digits. Second, the international I-O tables are prepared for less than 50
countries and hence we have to a lot of developing countries. While the export data are prepared for more than 100
countries.

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3. Model and Data
3.1. Model specification
To analyze the effect of host country's ECI on FDI inflow, we develop following regression
model based on a literature review of FDI determinants (see for example Aziz (2018), Cleeve et
al. (2015), and Buchanan et al. (2012)) and include the ECI as new predictive variable of FDI

ef] ,a = g + ij + kef] ,a−1 + l\#] ,a + mn ,a + o ,a

inflow among other explanatory variables:
(10)
In Equation (10), \#] ,a and ef] ,a are the ECI of host country jth and the inward FDI to country j

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in year t. As noted by Naude and Krugell (2007), the FDI inward is a dynamic process with a
certain degree of persistence, hence we include the first lag of FDI inflow as explanatory
variable. It is expected that k will be positive in the interval (0,1) and its magnitude indicates

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degree of persistence. Vector Z contains other explanatory variables of inward FDI, T is time
dummies, g is the intercept, and o ,a is the disturbance term. Moreover, based on the previous
section explanations, it is expected that coefficient l will be positive, which indicates the
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positive effects of accumulated productive capabilities of host countries to attack the FDI. The
other explanatory variable in the vector Z are: real GDP growth rate, real GDP per capita,
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physical capital, human capital, financial development, trade openness, and institutional
qualities. All variables except ECI and the economic growth are in the natural logs form.
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To investigate the impact of ECI on the effectiveness of human capital to attract the FDI, we
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include the interaction terms between ECI and human capital in the Equation (10) as follows:
ef] ,a = g + ij + kef] ,a−1 + l1 \#] ,a + l2 SpJ ,a + l3 (\#] ,a ∗ SpJ ,a ) + mn ,a + o ,a (11)
Where HUM is a proxy for stock of human capital in the host country j, and ECI*HUM is the
interaction term. The definition of other variables are as same equation (10). The total effect of

ref] ,a
human capita on the inward FDI equals to:

= l2 + (l3 ∗ \#] ,a ) (12)

rSpJ ,a
We expect a positive linkage between the total effects of human capital and the economic
complexity, i.e. l3 > 0.
Based on the market size’s growth hypothesis, we expect that the country’s GDP growth
promotes the FDI attraction. According to Çeviş and Çamurdan (2007), we put the first lag of
GDP growth rate into the model. Real GDP per capita is used as a proxy for real wages in the

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host country, and we expect that there will be a negative relationship between inward FDI and
real GDP per capita. As explained in the introduction, new wave of FDI is efficiency-seeking
and, hence, foreign investors seek countries with high human capital stock and skill labor.
Accordingly, we expect that there will be a positive relationship between FDI inward and the
human capital stock. Trade openness indicates the integration of the country with international
economy. Therefore, we expect that trade openness will have a positive relationship with FDI
inflow1. The country’s financial sectors enable the firms to finance the upfront fixed costs of FDI
through internal funds. Thus, we expect that the development of the host country’s economy will
have a positive relationship with FDI inward. The dynamism of domestic investment of the host

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country indicates the business environment, and is a signal for foreign investors. We expect that

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the domestic investment will have a positive relationship with FDI inward. Whereas FDI is
vulnerable to any form of uncertainty, especially due to the political risk, the government’s
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efficiency, the legal system, and the quality of the host country’s entities matter for FDI inward.
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To estimate the equations (10) and (11), we should consider two important point. First point is
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related to endogeneity problem of most explanatory variables in the equations. For example,
according to Freund and Pierola (2015), the top 1% of exporters, namely “export superstars”
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create RCA in most countries. In addition, most these export superstars are multinational
corporations. The larger host country of inward FDI could export more in both respects of
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destinations and varieties of exported goods. It is obvious that RCA index and FDI are positively
correlated. Therefore, ECI and EXPY based on RCA are correlated with FDI, and FDI is also
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positively linked to ECI/EXPY. In addition, the share of intra-firm trade or arm’s length trade is
significantly large (e.g. World Bank (2017)). The larger FDI host country export more varieties
of goods to more destinations2.
The second problem is related to dynamic structure of the equations. According to Nickell
(1981), using conventional panel data methods such as fixed effects or random effects leads to

1. According to Dunning and Lundan (2008), market-seeking type of FDI consists of foreign firms exporting
products or new markets in the host countries in order to boost their sales. Moreover, a high trade openness
generates little trade restrictions and less costs. In addition, Martínez-San Román et al. (2016) found a positive
robust correlation between trade integration and FDI attraction for the European Union countries. In contrast, Seim
(2009) argued that foreign firms that had to expand their market might resolve that as a high degree of openness,
little restriction, and low trade costs. This market can better serve through export rather than FDI.
2.The endogeneity problem of explanatory variables in the equations (10) and (11) are pointed out by two
anonymous referees. An anonymous referee explains existing bilateral correlation between ECI and inward FDI.
Our special thanks go to them for their helpful and valuable comments.

8
biased estimations especially when N is much larger than T as our case. In order to solve two
problems, we apply a dynamic panel data GMM-system estimator, which has been developed by
Blundell and Bond (1998), and combine the regression in differences with the regression in
levels and use the instrumental variables to control for endogeneity problem of explanatory
variables. The estimator’s stability depends on the instruments validity and the absence of serial
correlation. To this end, we applied the Sargan test to identify the instruments validity, and used
mj statistic to test the first and second-order serial correlation of the differenced residuals.1

3.2. Data

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In this paper, we collect the dataset for 79 countries2 over the period 1980–2014, the longest

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period in which the data were available for the maximum number of countries. Following to the
World Bank (2018), we categorize the sample countries into three groups including as high-
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income, middle-income, and low-income countries3 (Table S4 in the supplementary data).
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We take inward FDI data from United Nations Conference on Trade and Development
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(UNCTAD), ECI data from MIT’s Observatory of Economic Complexity

(https://atlas.media.mit.edu/en/), real GDP growth rate (YG) (proxy for market growth), real
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GDP per capita (constant 2010 US$) (YPER) (proxy for wage level), credit to private sector
(%GDP) (PRIV), and credit provided by banking sector (%GDP) (BANK) (proxies for financial
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development), mean years of schooling (HUM) (proxy for human capital), gross capital
formation (%GDP) (INV) ) (proxy for domestic investment), and total trade (%GDP) (OPEN)
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(proxy for trade openness) from the World Development Indicators (2018). Moreover, we used
four proxies for the institutional qualities, e.g. the voice and the accountability, the political
stability and the violence absence, the government effectiveness, the regulatory quality, and the
corruption control. The data for the mentioned variables is taken from the ICRG (International
Country Risk Guide) database over the period 1996–20144.

1
. This statistic has an asymptotically normal distribution (0,1).
2
. The countries have been listed in Table 1.
3
. In this paper, we consider upper the middle-income countries as middle-income, and the lower middle-income and
low middle-income countries as low-income.
4
. The control of corruption, as the perception of the extent to which the public power is employed for private gain,
includes both petty and grand forms of corruption, capture of the state by elites, and private interests. Government
effectiveness comes from the quality of public services, the quality of the civil services, the country’s independence
from political pressure, the quality of policy formulation and implementation, and the credibility of the
government’s commitment to such policies. Regulatory quality refers to the government’s ability to formulate and

9
Table 1 provides the average value of inward FDI (in Billion $) and the average value and
growth rate of ECI for three decades of 1980s, 1990s, 2000s, and the first half of 2010s in panels
A, B, and C, respectively. Dynamism of inward FDI over the period 1980–2014 indicated that
USA, China, and United Kingdom had the best performance over all decades. Over the two late
decades, Hong Kong, Singapore, Brazil, Mexico, Ireland, and Australia could attract an
impressive amount of FDI rather than the previous decades.
Dynamism of ECI over the period 1980–2014 (in panel B) indicates that Japan, Switzerland, and
Germany are ranked first, while Sweden, Austria, Finland, United Kingdom, and United States
are among top ten countries. Singapore and South Korea caught up to top ten countries since the

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decades 2000s and 2010s, respectively. In contrast, Republic of the Congo, Côte d'Ivoire, Ghana,

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Nigeria, and Guinea were in the lowest rank over all the decades. The growth rates of ECI
indicate that over the 1980s Pakistan, Brazil, Nicaragua, South Africa, and Singapore, over the
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1990s Oman, Saudi Arabia, Tunisia, Thailand, and Malaysia, over the 2000s Lebanon,
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Venezuela, Australia, Turkey, and Mozambique, and over the first half of 2010s Jamaica, United
Arab Emirates, Tunisia, Guatemala, and Australia had the highest growth rates of ECI.1\
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[Table 1]
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Figure 1 displays the average inward FDI as a function of the average ECI for all the decades.
Based on Figure 1, there has been a positive relationship between ECI and inward FDI.
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Moreover, countries with an ECI higher than zero can attract more FDI.

[Figure 1]

We calculated the EXPY, as second proxy of economic complexity/sophistication, by using real

GDP per capita (constant 2010 US$) and export’s values for the period of 1996–2014. Table 2
provides the results for the years 1996, 2000, 2005, 2010, and 2014. Results indicated that in the
years 1996 and 2000 Switzerland, Japan, Finland, Germany, and Sweden, in the year 2005

implement sound policies that promote private sector development. Political stability and absence of violence
measure perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or
violent means, i.e. political violence and terrorism.
1
. As noted, some part of ECI dynamism is related to time effect that may consist of data structure, country coverage
in different years, data quality, etc.

10
Switzerland, Singapore, Ireland, United Arab Emirates, and Japan, in the year 2010 Switzerland,
Ireland, Japan, Qatar, and Germany, and in the year 2014 Switzerland, United Arab Emirates,
Qatar, Ireland, and Japan had the highest EXPY across 79 sample countries. As can be seen,
United Arab Emirates and Qatar have the highest EXPY across the sample countries, while their
economy is not as complex as that of Japan. As noted in Section 2, it is the main weakness of the
EXPY index that income information is used in its calculation. Yet, United Arab Emirates and
Qatar that are the main exporters of oil-base products have high EXPYs. The solution is to use
ECI, because, there is a high correlation between EXPY and ECI. Figure 2 indicates the
correlation between the two variables for the years 1996, 2000, 2005, 2010, and 2014. As can be

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seen, there is a positive significant relationship between the two variables in all the years.

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[Table 2]
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[Figure 2]
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4. Empirical Results
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In order to study the effect of ECI on the inward FDI, the Equation (10) was estimated by using
dynamic panel GMM-system estimators. To this end, we estimated the equation for full sample,
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and using two proxies for economic complexity, i.e. ECI and EXPY, presented the results in
Tables 3 and 4. Moreover, to do the sensitivity analysis, we estimated the equation for the high-
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income, middle-income, and low-income countries. Tables S1, S2, and S3 in the supplementary
data provide the results for the sub-samples. Moreover, two proxies were used for financial
development and four proxies for institutional quality.
First, we estimated the equation (10) without institutional quality’s variables over the period
1980–2014. Results are prepared in Table 3. In order to estimate the equation by GMM-system
estimator, we use the lags of all explanatory variables (the lags t-2 to t-3 in the first differenced
equation and the lags t-1 to t-3 in the level equation) as instrumental variables to control for the
endogeneity of explanatory variables. Regarding the specification tests, the m1 and m 2 serial
correlation tests and Sargan test validated the choice of instruments in all cases. All variables
have the presumed sign, and their P-values indicate that all are statistically significant at the
conventional level. Based on the results, over the period 1980–2014, the ECI has a positive effect

11
on inward FDI, and the magnitude of its effect when we use the PRIV and BANK as proxy for
financial development is 0.238 and 0.288, respectively. Results indicate that a point increase in
the ECI will rise the inward FDI by 0.238% and 0.288%, respectively. Moreover, results show
that human capital has the most effect on inward FDI. So we expect that 1% increase in the mean
years of schooling of the host country will rise the inward FDI almost by 4%. Both proxies for
financial development of host country, PRIV and BANK, have robust positive effect on inward
FDI, but the magnitude effect of PRIV is larger than BANK. So 1% increases in the PRIV and
BANK will reach the inward FDI to 0.375% and 0.285%, respectively. Other variables, i.e. the
growth rate of real GDP, trade openness, and physical capital, have a robust positive effect, and

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real GDP per capita has a negative effect. We expect that a point increase in the YG will result in

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0.483% increase in the inward FDI. 1% increase in the physical investment and trade openness
will increase the inward GDI by 0.781% and 0.586%, respectively. In contrast, 1% increase in
-p
the real GDP per capita of the host country will decrease the inward FDI to 0.283%.
re
Columns 4 to 11 of Table 3 present the estimation results of the Equation (10) when the proxies
lP

of institutional quality are included in the regression model. For each institution’s quality proxy,
we estimate the Equation (10) twice: once with PRIV and once with BANK. Results show that
na

ECI has a robust positive effect on the inward FDI in all cases (statistically significant at 1%),
and its magnitude effect varies between 0.180 (when government effectiveness is used as proxy)
ur

and 0.501 (when corruption control is used as proxy). The first lag of inward FDI has a positive
significant effect on the inward FDI. Finding confirms the dynamic behavior of inward FDI in
Jo

the host countries. The coefficient of human capital varies between 2.748 and 6.631, and is
significant at 1% level. All four proxies for institution quality have a robust positive effect on
FDI attraction. So 1% increases in the political stability, government effectiveness, regulatory
quality, and corruption control (separately) will increase the inward FDI on the average of 0.8%,
0.6%, 0.15%, and 0.6%, respectively. A point increase in the real GDP growth increase inward
FDI almost by 3%–4%. Over this period, the human capital has still the greatest effect, among
explanatory variables, on FDI attraction. The other variables, i.e. physical investment, trade
openness, and real GDP per capita, have the expected significant effect on the inward FDI.

[Table 3]

12
We re-estimate the Equation (10) by using EXPY as a proxy for economic complexity over the
period 1996–2014 and prepare the results in Table 4. We used two proxies for financial
development and four proxies for institutional quality. Moreover, we use the lags of all
explanatory variables (the lags t-2 to t-3 in the first differenced equation and the lags t-1 to t-3 in
the level equation) as instrumental variables to control for the endogeneity of explanatory
variables. The specification tests, the m1 and m 2 serial correlation tests, and Sargan tests assessed
the validity of instruments in all cases. Results indicate that EXPY (in logs form) has positive
significant coefficients in all cases and its coefficient varies between 0.688 and 1.019. Based on
the results, if EXPY increases by 1%, inward FDI will increase by 0.98% on the average. Other

of
variables, except trade openness and real GDP per capita, have significant positive coefficients in

ro
most cases. Trade openness and real GDP per capita are statistically insignificant.
-p
[Table 4]
re
lP

The tables S1,S2, and S3 in the supplementary data presents the estimation results of the
Equation (10) for high-income, middle-income, and low-income countries. To this end, we use
na

the ECI and EXPY as proxy measures for economic complexity, the BANK as proxy for
financial development, and voice and the accountability, the political stability and the violence
ur

absence, the government effectiveness, the regulatory quality, and the corruption control as
proxy measures for institutional quality. Results are prepared in the supplementary data in Table
Jo

S1 (high-income countries), Table S2 (middle-income countries), and Table S3 (low-income

countries). As can be seen, the both proxies for economic complexity have positive and
statistically significant coefficients in all three groups. The coefficient of ECI in the low- and
middle-income countries is greater than that of high-income countries. Findings indicate the
importance of economic complexity to attract FDI in two groups of countries. Trade openness,
financial development, and real GDP per capita have the most insignificant coefficients among
the explanatory variables. The coefficient of human capital is statistically significant only in the
high-income countries, while in the other two groups, it is statistically insignificant.
In order to identify the impact of economic complexity on the effectiveness of human capital to
absorb the inward FDI, we estimate the Equation (11) once for the period 1980–2014 without the
inclusion of institution quality and once for the period 1996–2014 with the inclusion of

13
institution quality and prepare the results in Table 5. Moreover, to save the space, we present the
results only for the BANK as proxy for financial development.
Based on the Equation (11), the direct effect of human capital on inward FDI is l2 , which based
on the results in Table 5 is robust positive and equal to 4.107 for the period of 1980–2014 and
between 2.053 and 5.038 for the period of 1996–2014. Based on the results, the coefficient l3 is
positive and significant at least at 5% level and its coefficient equals to 0.698 for the period of
1980–2014, and is between 0.451 and 0.692 over the period 1996–2014. The Results confirm
that the economic complexity makes the stock of human capital more effective to attract the
inward FDI.

of
ro
[Table 5]

-p
The left panel of Figure 3 indicates the magnitude total effect of human capital on the inward
FDI i.e. l2 + l3 \#] (solid black line) and its 95% confidence intervals for various values of ECI
re
lP

in year 2014 (gray lines). As can be seen, if ECI increases from -2 to +2, the total effects of
human capital on the inward FDI will rise from 2.87 to 5.72. The right panel of Figure 3
na

illustrates the effect of human capital on inward FDI for five values of ECI, i.e. -2, -1, 0, 1, and
2. As can be seen, conditional to magnitude of ECI, each value of human capital has a different
ur

effect on FDI inflows. In other words, in each level of human capital, the effect increases when
the ECI gets larger. Finding has an important contribution to the literature. They explain different
Jo

performance of countries in FDI attraction, while the countries have similar human capital
stocks. In fact, the countries may have same human capital stocks, but the extent to which
knowledge and skills derive from this human capital is different.

[Figure 3]

14
5. Robustness check: bilateral inward FDI and ECI1
As a robustness check, we are going to test the effects of ECI on the bilateral FDI inflow from
home countries toward host countries. To this end, following to Hattari and Rajan (2009) and

tef] , ,a = g& + g&& + gu + l \#]SvJ ,a + mn ,a + o ,a

Konara and Wei (2014), we specify equation (13) as follows;
(13)
Where BFDI is FDI flow from country home country j toward host country jj in year t.
g& , g&& , and gu are home-country-specific, host-country-specific, and year-specific dummy
variables, respectively. \#]SvJ ,a is economic complexity index of host country j. z is a vector

of
of some determinants of bilateral FDI between home and host countries including the

ro
geographical distance between home and host countries (DIST), common
language(COMLAN), growth rates of real GDP per capita of the home country (GYHOM) and
-p
of the host country (GYHOST), the human capital of the host country (HUMHOST), and
re
institutional quality of host country (INSHOST). COMLAN is a binary variable (dummy
variable) equal to 1 if the home and host countries have a common official language. Except
lP

ECI, COMLAN, GYHOM, and GYHOST, other variables are in logs form.
na

We expect a positive linkage between all explanatory variables, except the geographical distance,
and bilateral inward FDI. Regarding geographical distance, a negative relationship is expected.
ur

We collected the bilateral FDI dataset for 79 countries, which are listed in Table
S3(supplementary data), over the period 2001-2012 from the UNCTAD FDI database and the
Jo

language and geographical distance dataset collected from the CEPII webpage.
We prepared the estimation results of equation (13) using OLS estimator and four proxies of
institutional quality in Table 6. To save space, we do not report the results of the host country
and home country, and year dummy variables. The results indicate the ECI of the host country
plays a significant role to attract the FDI from the world. The coefficient of ECI of host countries
varies between 3.824 to 4.038 and the results indicate that a unit increase in the ECI of host
countries increase the inward FDI to the host country about 4 percent. two other variables
common language and geographical distance have statistically significant effects on the FDI flow
to host countries. Greater distance between the home and host countries negatively affects the

1. An anonymous referee offered this section. Our special thanks go to him/her for his/her helpful and valuable
comments

15
inward FDI to host countries. In contrast, a common language between home and host countries
is positively associated with more FDI inflows to host countries. The estimated coefficients of all
three explanatory variables; ECI, COMLAN, and DIST are economically considerable and
among them, the absolute effects of a common language are greater than others. The estimated
coefficients of four proxies of institutional qualities indicate that the estimated coefficients of all
proxies are positive and except for regulatory quality, the coefficients of the political stability,
government effectiveness, and corruption control are statistically significant at 5%, 1%, and 5%,
respectively. Other results indicate that the coefficients of other explanatory variables including
the growth rates of real GDP of host countries and home countries and the human capital of host

of
countries are statistically insignificant.

ro
[Table 6]
6. Conclusion -p
In the new wave of FDI inflows, foreign investors seek countries with much human capital stock
re
and productive capabilities. Hence, the new literature is centered on the effect of host countries’
lP

knowledge role and productive capabilities on attracting of FDI. In this paper, we used two new
proxies, namely ECI and EXPY, which measures the relative knowledge and capabilities
na

intensity of an economy, and establishes a country’s productive structure. Results indicate that
first, ECI is one of the important determinants of FDI inflow, so it has a robust positive effect on
ur

FDI attraction in various ways. Secondly, the interaction between economic complexity and
human capital of the country is intensified by FDI attraction.
Jo

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18
 Table1. The average value of inward FDI and ECI, and the growth rate of ECI

Panel A: Average value of FDI (Billion $) Panel B: Average value of ECI Panel C: Growth rate of ECI
Countries
1980s 1990s 2000s 2010s 1980s 1990s 2000s 2010s 1980s 1990s 2000s 2010s
Algeria 0.034 0.158 1.414 1.498 -0.9(69) -0.74(65) -0.92(72) -1.59(80) -65.89 14.09 27.79 51.56
Argentina 0.584 6.813 5.153 10.690 0.02(40) 0.02(39) 0.04(39) -0.28(47) -194.91 -4.94 6.64 -727.51
Australia 3.899 5.870 20.028 45.169 -0.08(43) -0.05(41) -0.15(45) -0.64(59) -29.00 -79.93 964.05 173.62
Austria 0.288 2.206 8.123 5.211 1.85(6) 1.98(5) 1.74(7) 1.71(6) 1.85 -6.94 -5.59 -1.29
Bangladesh 0.002 0.182 0.617 1.455 -0.63(63) -0.91(71) -1.06(74) -1.1(76) 56.97 40.86 -6.97 17.94

f
Belgium 2.245 22.709 51.003 27.569 1.45(12) 1.48(12) 1.31(15) 1.03(17) -0.35 -0.27 -18.18 -17.77

o
Bolivia 0.030 0.423 0.375 0.920 -0.92(70) -0.81(69) -0.85(69) -1.04(74) 5.76 -10.90 1.93 59.31

ro
Brazil 1.721 9.922 23.960 74.402 0.27(30) 0.53(24) 0.45(28) 0.07(35) 401.71 51.02 -55.90 -82.60
Cameroon 0.096 0.028 0.234 0.503 -1.53(79) -1.78(81) -1.64(81) -0.89(69) 28.62 2.78 -18.33 -40.11

-p
Canada 3.782 10.608 41.071 46.858 0.81(21) 0.77(20) 0.83(21) 0.5(27) -9.63 21.36 -19.36 -43.38

re
Chile 0.481 3.247 7.874 20.165 -0.32(54) -0.28(48) -0.15(47) -0.42(52) 116.31 -72.98 84.22 156.64
China 1.619 29.043 68.642 124.637 0.25(31) 0.23(28) 0.52(26) 1.01(18) -26.81 -8.33 144.70 55.35

lP
Hong Kong 2.133 9.028 38.241 99.831 0.93(18) 0.6(23) 0.56(25) 1.06(16) -0.12 -61.38 6.96 145.26
Colombia 0.479 1.807 5.642 13.370 -0.01(41) -0.06(42) 0.13(36) -0.07(39) -50.94 -135.39 62.33 -183.00

na
Costa Rica 0.072 0.351 1.269 2.508 0.08(37) -0.11(44) 0.01(41) 0.11(33) -100.85 44.67 -311.95 -135.85
Côte d'Ivoire 0.049 0.232 0.305 0.385 -1.18(74) -1.43(79) -1.24(78) -1.17(77) 19.32 -3.00 17.82 -20.16
Denmark
Dominican
0.234

0.068
4.265

0.382
6.897

1.338
1.842

2.308
ur
1.45(11)

-0.2(49)
1.63(11)

-0.47(54)
1.47(11)

-0.35(54)
1.08(15)

-0.34(49)
18.52

24.94
-3.20

142.20
-18.00

-59.59
-30.37

131.03
Jo
Republic
Ecuador 0.085 0.471 0.533 0.700 -0.94(71) -0.98(74) -0.84(68) -0.98(73) 50.18 -5.17 3.07 77.99
Egypt 0.860 0.805 4.799 4.621 -0.45(58) -0.45(53) -0.31(52) -0.32(48) 19.80 -23.47 -32.94 24.42
El Salvador 0.013 0.153 0.500 0.227 0.22(32) 0.1(35) -0.1(43) -0.09(41) 54.27 -109.48 4.94 134.90
Finland 0.171 2.451 5.118 5.628 1.54(10) 1.88(7) 1.8(6) 1.59(8) 18.31 4.80 -7.65 -12.61
France 4.138 23.024 26.063 24.254 1.67(8) 1.64(10) 1.54(10) 1.31(11) -1.50 -1.47 -7.33 -16.62
Germany 1.423 1.707 51.564 35.696 2.09(2) 2.27(2) 2.13(2) 1.88(3) 5.35 3.14 -15.26 1.54
Ghana 0.009 0.113 0.627 3.139 -1.14(73) -1.42(78) -1.18(77) -1.18(78) 5.67 21.09 -25.44 3.22
Greece 0.581 0.897 2.115 1.642 0.28(29) 0.1(34) 0.2(31) -0.04(38) -32.68 -3.61 54.73 -227.73
Guatemala 0.108 0.152 0.469 1.164 -0.01(42) -0.13(45) -0.28(51) -0.37(50) -313.65 63.61 -21.22 194.31
Honduras 0.025 0.086 0.562 1.120 -0.58(60) -0.6(62) -0.68(64) -0.5(55) 29.73 32.72 17.39 -43.86
India 0.105 1.517 16.083 32.441 0.19(33) 0.12(31) 0.19(32) 0.04(36) -50.83 -14.16 -25.45 -48.44

1
Indonesia 0.438 0.326 2.192 8.314 -1.27(77) -0.39(51) -0.06(42) -0.12(44) -57.64 -69.90 -39.27 -192.54
Iran -0.048 0.000 2.222 3.299 -1.22(75) -1.06(75) -0.89(71) -0.95(72) -12.23 -36.47 11.18 -9.64
Ireland 0.221 3.854 7.367 64.273 1.32(13) 1.41(13) 1.44(12) 1.26(13) 21.52 -2.84 -5.18 -1.13
Israel 0.118 1.278 5.948 9.038 1.12(16) 1.15(16) 1.13(17) 1.19(14) 40.11 -0.46 -2.81 6.20
Italy 1.924 4.252 20.381 18.403 1.68(7) 1.66(9) 1.4(13) 1.28(12) 1.23 -13.12 -9.18 -7.39
Jamaica 0.008 0.223 0.729 0.485 -0.12(46) -0.52(58) -0.41(55) -0.48(54) 229.68 192.06 -74.84 411.84
Japan 0.180 2.637 9.313 1.565 2.13(1) 2.5(1) 2.42(1) 2.3(1) 26.55 5.08 -14.05 10.20
Jordan 0.046 0.089 1.630 1.741 0.7(23) 0.1(33) 0.07(37) 0.08(34) -36.93 -39.50 7.95 -341.41

f
Kenya 0.030 0.021 0.343 1.098 -0.76(67) -0.76(66) -0.61(62) -0.56(56) 224.12 -38.44 -14.84 21.94

o
South Korea 0.529 3.076 9.565 9.152 0.9(19) 0.97(18) 1.38(14) 1.77(4) -2.42 23.49 25.01 26.12

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Kuwait 0.000 0.056 0.144 1.686 0.03(39) -0.54(59) -0.33(53) -0.69(61) 100.05 262.53 45.48 89.44
Lebanon 0.001 0.398 2.734 2.980 0.52(24) 0.06(38) 0.13(35) 0.21(31) -55.42 -147.41 3596.44 -30.96

-p
Madagascar 0.004 0.019 0.382 0.631 -1.25(76) -0.79(68) -1.12(76) -0.87(67) 16.76 -1569.27 -14.09 -6.49

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Malaysia 0.965 4.816 4.199 10.768 -0.09(44) 0.26(27) 0.72(22) 0.82(24) -87.95 510.98 -3.36 55.42
Mexico 2.388 8.539 24.275 30.209 0.5(25) 0.76(21) 1(19) 0.95(19) 59.56 2.55 4.95 -3.95

lP
Morocco 0.065 0.559 1.827 2.831 -0.22(51) -0.59(61) -0.59(61) -0.61(57) 150.17 86.86 -24.54 48.24
Mozambique 0.002 0.092 0.366 4.192 -0.38(56) -0.36(50) -1.08(75) -1.23(79) -35.49 -52.07 313.04 -14.85

na
Netherlands 2.720 15.449 38.533 35.858 1.18(14) 1.31(14) 1.16(16) 0.89(22) 10.11 6.50 -20.02 -21.43
New Zealand 0.259 2.075 1.382 1.982 0.41(27) 0.36(26) 0.28(29) -0.01(37) 23.63 -8.35 -18.89 -111.23
Nicaragua 0.004 0.100 0.304 0.807 -0.41(57) -0.57(60) -0.8(67) -0.91(70) 335.91 79.80 -17.80 53.78
Nigeria 0.434 1.494 4.179
ur
5.918 -1.98(82) -2.06(82) -2.23(82) -1.82(81) -26.99 2.75 36.24 -22.43
Jo
Norway 0.446 2.529 6.361 12.443 0.95(17) 0.86(19) 0.7(23) 0.62(25) 1.41 -18.53 -23.76 8.31
Pakistan 0.089 0.478 2.301 1.422 -0.26(53) -0.73(64) -0.69(65) -0.82(64) 453.32 46.00 -34.18 56.33
Panama -0.010 0.497 1.180 3.601 0.18(35) 0.11(32) 0.15(33) 0.24(30) -95.35 -85.54 278.23 -310.99
Paraguay 0.018 0.134 0.089 0.439 -0.85(68) -0.76(67) -0.58(60) -0.83(65) -3.43 -47.27 -16.98 80.78
Peru 0.029 1.576 3.193 8.349 -0.32(55) -0.41(52) -0.57(59) -0.85(66) 63.45 44.30 47.35 54.80
Philippines 0.318 1.194 1.635 3.117 -0.22(52) -0.16(46) 0.02(40) 0.36(29) 50.88 100.38 -462.15 88.87
Poland 0.016 3.145 10.012 12.085 0.84(20) 0.69(22) 0.96(20) 0.93(20) -19.53 15.70 14.11 -19.59
Portugal 0.360 1.739 4.626 5.220 0.8(22) 0.5(25) 0.6(24) 0.56(26) -20.47 -31.21 26.69 -33.27
Qatar -0.001 0.160 2.560 1.213 0.15(36) -0.5(56) -0.24(50) -0.39(51) -11.91 -917.05 -69.10 61.07
Saudi Arabia 2.353 0.251 13.448 13.790 -1.01(72) 0.01(40) -0.13(44) -0.2(46) -98.71 1132.97 306.97 87.70
Senegal 0.007 0.057 0.158 0.334 -0.49(59) -0.9(70) -0.89(70) -0.81(63) 27.01 11.04 26.80 -27.14
Singapore 1.907 8.979 21.889 61.620 0.48(26) 0.98(17) 1.55(9) 1.69(7) 303.15 83.90 1.67 8.83

2
 South Africa 0.014 0.850 4.098 4.706 -0.18(48) 0.07(37) 0.14(34) -0.08(40) 308.20 -208.05 -62.18 -215.66
Spain 3.381 10.772 36.527 28.158 1.13(15) 1.18(15) 1.06(18) 0.82(23) 12.84 -11.39 -7.46 -35.55
Sri Lanka 0.040 0.158 0.338 0.813 -0.58(61) -0.6(63) -0.53(57) -0.45(53) 6.08 26.29 -26.42 0.87
Sweden 0.706 13.039 17.864 7.274 1.99(4) 2.14(4) 1.98(4) 1.72(5) 10.56 -9.11 -8.67 -7.36
Switzerland 0.944 4.442 17.113 27.119 1.99(3) 2.25(3) 2.08(3) 2.01(2) 5.13 0.10 -12.21 10.85
Thailand 0.515 3.184 6.169 8.510 -0.14(47) 0.13(30) 0.46(27) 0.91(21) -67.41 764.79 63.42 61.86
Togo 0.011 0.014 0.053 0.236 -1.46(78) -1.1(76) -0.77(66) -0.68(60) 8.55 -5.78 -16.11 -84.00
Tunisia 0.179 0.420 1.346 1.241 0.05(38) -0.23(47) -0.15(46) 0.19(32) -67.32 1112.13 -99.13 195.96

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Turkey 0.168 0.772 9.060 13.558 0.18(34) 0.1(36) 0.25(30) 0.39(28) -279.28 -40.72 324.08 -15.64

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United Arab
0.056 0.071 5.912 8.981 -0.21(50) -0.34(49) -0.17(48) -0.11(43) -63.51 37.92 -77.73 313.90

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Emirates
United Kingdom 10.392 32.477 93.775 47.558 1.85(5) 1.88(6) 1.83(5) 1.47(9) -0.21 3.53 -18.34 -13.58

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United States 33.681 89.064 174.473 224.724 1.56(9) 1.75(8) 1.74(8) 1.42(10) 2.29 23.21 -17.70 -10.60
Uruguay 0.050 0.116 0.882 2.305 0.34(28) 0.18(29) 0.05(38) -0.11(42) -39.90 12.80 -38.65 -3171.44

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Venezuela 0.156 2.142 1.970 2.980 -0.65(65) -0.09(43) -0.24(49) -0.89(68) -85.23 -167.67 2741.03 50.73

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Viet Nam 0.006 1.338 3.556 8.965 -0.73(66) -0.92(73) -0.54(58) -0.18(45) 218.55 -16.97 -50.57 -87.59
Zambia 0.052 0.139 0.521 1.623 -0.62(62) -0.92(72) -1.02(73) -0.7(62) -7.70 37.26 7.92 -45.91
Zimbabwe 0.008 0.095 0.043 0.386 -0.64(64) -0.47(55) -0.46(56) -0.92(71) 34.34 -10.88 48.30 27.13

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Note: The figures in the parentheses are country’s rank in our sample, in which 1 is the highest rank, and 82 is the lowest. We calculated the growth rate of
ECI over any decades. The value for 2010s are related to the first half of the decade.

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 Table 2: The value of EXPY in the years of 1996, 2000, 2005, 2010, and 2014
Country 1996 2000 2005 2010 2014
Algeria 19361.947 22701.766 22490.287 23140.237 24152.438
Argentina 15272.768 16635.754 17529.985 17780.277 18922.718
Australia 17627.788 19181.210 21545.789 22981.915 24645.145
Austria 21982.526 23208.908 24334.513 25441.427 26606.687
Bangladesh 8658.666 7939.741 8290.068 7364.277
Belgium 21987.822 24471.316 24981.735 25651.029
Bolivia 9799.508 13114.837 17003.064 18800.376 22286.258
Brazil 16129.328 18255.880 19466.696 20030.412 20587.601
Cameroon 12653.329 15050.269 15739.412 14033.211 16041.825
Canada 21091.423 23010.094 23308.001 22793.854 23202.149
Chile 9605.450 11445.849 10808.737 11945.301 12922.267
China 16081.658 17806.064 20116.627 21001.813 21336.800
Hong Kong 17184.071 15609.150 15030.574 21645.906 24809.493
Colombia 13969.485 15241.353 16962.533 17644.428 18231.520
Congo 17536.488 17065.894
Costa Rica 9881.890 16109.060 17184.638 18483.667 19290.039
Côte d'Ivoire 5932.106 8714.819 11522.808 10183.342 10891.913
Denmark 20758.929 21901.016 24060.809 23983.270 26171.140
Dominican 15476.052 13822.104 16019.575 17358.378

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Republic
Ecuador 12264.364 13368.332 16765.638 15517.120 15900.060
Egypt 14138.915 13721.490 19128.720 16649.777 17368.171
El Salvador 11026.326 17798.151 11877.278 12529.351 13586.235

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Finland 22999.249 25099.982 25395.995 25919.594 26977.819
France 21571.972 23007.242 24386.452 25553.745 26573.337
Germany 22824.127 24386.422 25830.466 26220.281 27283.794
Ghana
Greece
Guatemala
Honduras
6423.079
13380.917
10144.181
8359.168
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9344.485
15328.983
11329.371
8616.388
8363.057
17921.721
12293.111
9484.397
8299.576
19053.018
12363.237
13177.217
20599.701
13439.028
13007.221
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India 13406.342 15365.543 17845.287 19658.334 20735.748
Indonesia 14232.159 17624.207 17271.788 17249.926 18168.274
Iran 17312.542 21525.395 19634.041 20395.529
Ireland 21716.609 24341.269 28443.827 30134.811 30409.600
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Israel 18972.899 21540.349 23986.641 24402.393 24649.837

Italy 20555.898 21594.058 23186.126 23476.721 24589.156
Jamaica 7833.860 8679.569 9835.922 13846.931 14921.799
Japan 23949.167 25583.366 26464.278 26423.760 27483.816
Jordan 13027.046 13033.091 14945.601 15291.273
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Kenya 9235.729 8678.884 11698.683 11549.961

Kuwait 20821.127 17889.166 19393.733 19859.494
Madagascar 6880.320 7742.083 12329.318 12110.171 9953.521
Malaysia 18665.365 21055.353 20851.787 21028.228 22005.439
Mexico 20582.250 21960.991 22693.130 22714.018 23242.496
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Morocco 8882.968 10211.348 11277.636 12092.375 14249.993

Mozambique 9477.993 9262.355 12966.688 14027.835 18116.686
Netherlands 19912.306 21683.845 24474.377 24091.711 23696.126
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New Zealand 18111.482 19560.956 20068.994 20922.213 23521.075

Nicaragua 11056.147 9180.089 12099.101 12609.352 11817.116
Nigeria 20432.883 17752.559 17997.610 20123.394
Norway 19662.546 19643.882 22161.651 22860.864 24144.969
Pakistan 8492.310 9241.787 9838.472 10175.163 10726.011
Panama 9455.322 9724.557 10604.982 13879.069 23539.278
Paraguay 8052.736 6688.890 11106.996 13006.319 13840.471
Peru 9050.168 10557.639 10168.988 11692.917 13031.082
Philippines 17223.241 19727.642 19278.506 23790.986 20312.342
Poland 17885.519 20191.212 21923.634 21888.617 22174.497
Portugal 17149.730 18964.385 20441.921 20544.359 21201.165
Qatar 19912.334 23371.150 24455.069 26388.919 30554.290
Republic of 20115.146 22094.032 23550.594 23492.371 23824.230
Korea
Saudi Arabia 19794.640 18667.087 21323.461 19243.231 19934.685
Senegal 10202.415 10444.526 14369.894 14590.765 15941.860
Singapore 21187.032 22101.057 28772.630 24990.245 26344.846
South Africa 16075.961 18700.713 19025.912 20704.377 21305.226
Spain 20237.487 21462.578 22443.265 22549.483 23536.668
Sri Lanka 8739.466 10058.926 9585.694 10872.857
Sweden 22617.016 24785.714 26005.757 25629.794 26331.292
Switzerland 24655.043 27255.757 29868.785 31187.117 33266.564
Thailand 16576.514 18813.718 20279.362 20676.689 21903.625
Togo 3692.999 6998.302 10063.064 9868.551 11224.001
Tunisia 12114.482 12394.251 14221.420 15634.384 16920.101
Turkey 13357.245 15003.558 17678.159 18372.784 19565.825
United Arab 27330.333 30695.986
Emirates
United 22216.376 23523.036 25585.468 25862.355 26729.034
Kingdom
United States 21668.069 23394.210 25455.734 24958.424 26635.789

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 Country 1996 2000 2005 2010 2014
Uruguay 15526.405 16760.030 16522.654 16907.292 18803.939
Venezuela 18524.721 17138.445 19363.522 18432.908
Viet Nam 13007.897 14721.386 15036.971 16542.682
Zambia 7528.015 7643.760 8647.144 9753.538 10248.099
Zimbabwe 9069.038 9587.938 10746.509 9620.159 9372.710
Note: We compute the EXPY index using GDP per capita (constant 2010 US$) (which is
prepared by World Bank) and export nominal dataset (which is prepared by UN COMTRADE).
To see how we calculated the EXPY index, please see footnotes 4 and 5.

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 Table 3. Estimation results of Equation (10) (ECI index is used as proxy for economic complexity)
Period: 1996–2014
Period: 1980–2014 Proxies for institution quality
Independent variables Government Control of
Political stability effectiveness Regulatory quality corruption
(1) (2)
(3) (4) (5) (6) (7) (8) (9) (10)
FDI(-1) 0.393 0.375 0.258 0.248 0.327 0.252 0.325 0.330 0.346 0.218

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(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

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ECI 0.288 0.238 0.225 0.278 0.258 0.180 0.259 0.219 0.212 0.501
(0.005) (0.002) (0.003) (0.000) (0.000) (0.006) (0.000) (0.001) (0.001) (0.000)

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INV 0.786 0.781 0.848 0.964 1.014 1.311 0.868 0.918 0.909 0.674
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
4.190 4.755 6.631 6.023 3.912 5.935 5.125 5.040 4.571 2.748

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HUM (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
OP 0.649 0.586 0.155 0.264 0.346 0.232 0.195 0.204 0.130 0.159
(0.000) (0.000) (0.043) (0.012) (0.000) (0.071) (0.000) (0.000) (0.091) (0.000)

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PRIV 0.375 0.523 0.619 0.415 0.479
(0.000) (0.000) (0.000) (0.009) (0.000)
0.285 0.391 0.361 0.410 0.739

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BANK (0.001) (0.001) (0.020) (0.002) (0.000)
YG 0.404 0.483 3.644 3.155 4.039 3.880 3.472 3.278 2.986 2.531
(0.007) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
-0.282 -0.283 -0.528 -0.325 -0.437 -0.424 -0.370 -0.338 -0.356 0.150

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YPER (0.086) (0.027) (0.000) (0.064) (0.024) (0.011) (0.027) (0.043) (0.010) (0.123)
INSTITUT 0.817 0.841 0.581 0.625 0.139 0.173 0.187 0.135
(0.000) (0.000) (0.006) (0.072) (0.003) (0.004) (0.025) (0.029)
CONST 13.863
(0.000)
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13.436
(0.000)
17.052
(0.000)
16.151
(0.000)
17.695
(0.000)
Specification tests(p-values)
17.627
(0.000)
15.310
(0.000)
15.097
(0.000)
15.394
(0.000)
14.930
(0.000)
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First. order serial correlation test 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(M1 test)
First. order serial correlation test 0.172 0.199 0.221 0.231 0.226 0.367 0.157 0.150 0.110 0.110
(M2 test)
Sargan over-identification test 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Number of countries 79 79 79 79 79 79 79 79 79 79

Notes: The dependent variable in all models is the inward FDI (in natural logs). The Figures in the parentheses are the coefficients P-value. In all
regressions, we treat explanatory variables as endogenous, and utilize them by using lags t-2 and t-3 in the first-differenced equation, and lags t-1
and t-3 in the level equation. We included the year dummies in all regression models. To save the space, we did not report the results. The
variables are defined as follow:
FDI(-1) (first lag of inward FDI (in natural logs)), ECI (Economic complexity index), INV (gross capital formation (%GDP) (in natural logs)),
HUM (mean years of education (in natural logs)), OP (total trade (% GDP) (in natural logs)), PRIV (credit to private sector (%GDP) (in natural
logs)), BANK (credit private by banking sector (%GDP) (in natural logs)), YG (growth rate of real GDP), YPER (real GDP per capita (in natural
logs)), INSTITUT (proxies for institution quality (in natural logs)), and CONST (constant term).

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Table 4: Estimation results of Equation (10) (EXPY index is used as proxy for economic
complexity)
Period: 1996–2014
Proxies for institution quality
Independent variables Government Control of
Political stability Regulatory quality
effectiveness corruption
(1) (2) (3) (4) (5) (6) (7) (8)
0.246 0.256 0.257 0.261 0.292 0.299 0.268 0.271
FDI (-1) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
0.984 1.013 1.019 0.897 0.688 0.980 0.991 0.998
EXPY (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
0.880 0.834 1.362 1.331 0.761 0.905 0.738 0.745

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INV (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
5.206 5.239 5.649 4.446 3.773 5.080 3.989 4.027
HUM

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(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
-0.044 -0.099 0.042 0.029 0.027 -0.062 0.122 0.113
OP
(0.641) (0.287) (0.662) (0.636) (0.822) (0.520) (0.225) (0.263)
PRIV
0.496
(0.000)
0.464
0.122
(0.330)
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0.570
(0.001)
0.343
0.386
(0.000)
0.380
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BANK
(0.000) (0.566) (0.003) (0.000)
2.877 2.732 3.489 3.208 2.927 2.859 3.014 2.913
YG (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
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-0.209 -0.160 -0.629 -0.084 0.068 -0.182 0.007 0.016

YPER
(0.428) (0.480) (0.053) (0.827) (0.778) (0.239) (0.977) (0.949)
0.918 0.922 1.378 0.962 0.088 0.013 0.287 0.288
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INSTITUT (0.000) (0.000) (0.001) (0.018) (0.130) (0.844) (0.008) (0.008)

6.022 4.989 9.928 6.708 6.333 4.416 4.301 4.083
CONST
(0.034) (0.008) (0.000) (0.008) (0.001) (0.081) (0.039) (0.040)
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Specification tests (p-values)

First. order serial
correlation test (M1 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
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test)
First. order serial
correlation test (M2 0.156 0.144 0.232 0.216 0.127 0.127 0.112 0.108
test)
Sargan over-
1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
identification test
Number of countries 79 79 79 79 79 79 79 79

Notes: The dependent variable in all models is the inward FDI (in natural logs). The Figures in
the parentheses are the coefficients P-values. In all regressions, we treat explanatory variables
as endogenous, and utilize them by using lags t-2 and t-3 in the first-differenced equation, and
lags t-1 and t-3 in the level equation. We included the year dummies in all regression models.
To save the space, we did not report the results. The variables are defined as follows:
FDI (-1) (first lag of inward FDI (in natural logs)), EXPY (EXPY-index (in natural logs)),
INV (gross capital formation (%GDP) (in natural logs), HUM (mean years of education (in
natural logs)), OP (total trade (%GDP) (in natural logs)), PRIV (credit to private sector
(%GDP) (in natural logs)), BANK (credit private by banking sector (%GDP) (in natural logs)),
YG (growth rate of real GDP), YPER (real GDP per capita (in natural logs)), INSTITUT
(proxies for institution quality (in natural logs)), and CONST (constant term).

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Table 5: Estimation results of Equation (11)
Period: 1996-2014
Proxies for institution quality
Independent variables Period: 1980-2014
Political Government Regulatory Control of
stability effectiveness quality corruption
FDI(-1) 0.481 (0.000) 0.269 (0.000) 0.103 (0.000) 0.053 (0.005) 0.269 (0.000)
ECI -0.789 (0.016) -0.614 (0.000) -0.667 (0.000) -0.601 (0.000) -0.427 (0.009)

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INV 0.550 (0.000) 0.692 (0.000) 0.868 (0.000) 0.893 (0.000) 0.725 (0.000)

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HUM 4.107 (0.000) 5.038 (0.000) 3.885 (0.000) 3.511 (0.000) 2.053 (0.000)

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OP 0.525 (0.000) 1.291 (0.000) 0.253 (0.001) 0.105 (0.232) 0.412 (0.000)
BANK -0.168 (0.420) 0.168 (0.026) 0.784 (0.000) 0.849 (0.000) 0.724 (0.000)

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YG 0.638 (0.177) 2.085 (0.000) 3.373 (0.000) 2.624 (0.000) 2.572 (0.000)
YPER 0.203 (0.178) -0.649 (0.000) -0.419 (0.000) -0.281 (0.002) -0.196 (0.000)

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INSTITUT 0.528 (0.133) 0.629 (0.032) 0.400 (0.002) 0.136 (0.026)

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ECI*HUM 0.698 (0.045) 0.507 (0.005) 0.569 (0.000) 0.692 (0.000) 0.457 (0.000)
CONST 6.624 (0.123) 19.719 (0.000) 22.273 (0.000) 22.181 (0.000) 17.834 (0.000)
Specification tests (p-values)

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First. order serial correlation
0.000 0.000 0.000 0.000 0.000
test (M1 test)
First. order serial correlation
test (M2 test) ur
0.121 0.123 0.737 0.928 0.152
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Sargan over-identification
1.000 1.000 1.000 1.000 1.000
test
Number of countries 79 79 79 79 79

Notes: The dependent variable in all models is the inward FDI (in natural logs). The Figures in the parentheses are the
coefficients P-value. In all regressions, we treat explanatory variables as endogenous, and instrument them by using lags t-2
and t-3 in the first-differenced equation, and lags t-1 and t-3 in the level equation. We included the year dummies in all
regression models. To save the space, we did not report the results. The variables are defined as follow:
FDI(-1) (first lag of inward FDI (in natural logs)), ECI (Economic complexity index), INV (gross capital formation (%GDP)
(in natural logs)), HUM (mean years of education (in natural logs)), OP (total trade (%GDP) (in natural logs)), PRIV (credit to
private sector (%GDP) (in natural logs)), BANK (credit private by banking sector (%GDP) (in natural logs)), YG (growth rate
of real GDP), YPER (real GDP per capita (in natural logs)), INSTITUT (proxies for institution quality (in natural logs)),
ECI*HUM (interaction economic complexity and human capital), and CONST (constant term).

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Table 6: The estimation results of Equation (13): ECI & bilateral FDI
Government
Political stability Regulatory quality Control of corruption
Variable effectiveness
Coefficient Prob. Coefficient Prob. Coefficient Prob. Coefficient Prob.

\#]SvJ
Constant 12.601 0.000 12.462 0.005 12.031 0.000 12.801 0.000
3.914 0.000 4.038 0.000 3.824 0.000 3.924 0.000
COMLAN 4.360 0.000 4.360 0.000 4.359 0.000 4.359 0.000
DIST -3.365 0.000 -3.366 0.000 -3.366 0.000 -3.366 0.000

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GYHOST 2.391 0.320 3.842 0.224 3.707 0.119 2.771 0.244

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GYHOM 0.593 0.821 0.718 0.790 0.670 0.798 0.678 0.796

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HUMHOST -3.647 0.282 -3.740 0.542 -3.742 0.268 -4.295 0.203
INSHOST

-p
1.656 0.044 0.373 0.000 0.197 0.164 0.344 0.029
Year fixed effect YES YES YES YES

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Home country fixed effect YES YES YES YES
Host country fixed effect YES YES YES YES

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R-squared 0.4269 0.4272 0.4268 0.4270
Adjusted R-squared 0.4226 0.4228 0.4225 0.4227

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Observations 23121 23121 23121 23121

Notes: \#]SvJ&,u , \#]Svxj&&,u , DIST, COMLAN, GYHOM, GYHOM, HUMHOST, and INSHOST are economic complexity index of home and host
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countries, geographical distance between home and host counties, common language dummy, growth rates of real GDP per capita of home country and of host
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country, human capital of host country and institutional quality of host country, respectively. We compute the robust standard error using Newey-West method.

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Figure 1. Correlation between inward FDI and ECI over various decades
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Note: We calculated the average values of inward FDI and ECI for any decades. The bilateral relationship
between FDI and ECI was estimated by using OLS estimator.

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Figure 2: Correlation between EXPY and ECI in the years 1996, 2000, 2010, and 2014
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Note: Figures of EXPY are in the logs form.

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 8

Total effect of Human capital

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0
0 0.2 0.4 0.6 0.8 1 1.2 1.4
Human capital index (in natural logs)

ECI = -2 ECI = -1 ECI = 0 ECI = 1 ECI = 2

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Figure 3: The effect of human capital on FDI inflows depending on the ECI

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Note: The black line in the left panel is the total effect of human capital, and the gray lines are 95%
confidence intervals. The lines in the right panel, from top to down, are related to the total effect of
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human capital, where the ECI equal to 2, 1, 0, -1, and -2, respectively.
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Dea Dr. Swetha Soman

Thank you in advance for your email and effort. This is regarding the production process of
my paper INTECO_263 entitled “Economic Complexity, Human Capital, and FDI Attraction:
A Cross Country Analysis”.

Corresponding to Q1: Our paper title page containing author’s name and affiliation are
provided in the first page of our manuscript which is attached to this email. The First page is
our title page.

Corresponding to Q2: The main tables and Figures are presented in the manuscript and the
supplementary data are presented in another file which is attached to this email in the name of
“supplementary data”. The place of each tables and Figures are specified in the text.

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Please kindly download these file.

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Sincerely yours

Pegah Sadeghi
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