Health expenditure and FDI in Europe

The quality of local institutions and the governmental measures sustaining Foreign Direct Investments (FDI) are some of the traditional determinants of multinational agglomerations. One institution which has so far been under-investigated is the health system. Yet several empirical contributions have shown that health is a constituent part of human capital (Bloom and Canning, 2004; Alsan et al., 2006; Ogundari and Awokuse, 2018). Therefore, the quality of the health system may be considered an important FDI attractor factor alongside infrastructures, education, labor force and R&D expenditure (Ingram and Silverman, 2002; Blomström, 2006). The aim of this contribution is to investigate the role of different national institutional settings in attracting FDI within the 28 Member States of the European Union. More specifically, the research focuses on the relation between health expenditure and FDI, assuming that a proxy for institutional quality is the percentage of public health expenditure on the total health expenditure. We adopt a panel GLS methodology with heteroskedasticity and specific autocorrelation and we use a dataset for the 28 European countries that are part of the EU in the period 2000–2013. By means of three model-specifications, we investigate the relation between the inward stock of FDI and: the percentage of government health expenditure on the total health care expenditure; the percentage of Out-Of-Pocket (OOP) expenditure on the total private health care expenditure; and the health coverage regime. We also explore the relation between FDI and population health, a facet of human infrastructure (Globerman and Shapiro, 2002) expressed by healthy life years (HLYs) and the percentage of population claiming to be in perfect/good health. Control variables relate to government regulatory quality, market dimension, government effort in R&D in higher education; and labor productivity. In all models the relation among the dependent variable and the explicative variables related to health expenditure is always significant and, unsurprisingly, it is positive for the percentage of public health expenditure and negative for the percentage of OOP expenditure. The variables describing population health are always positively related to FDI, though population health, expressed in HLYs, is always statistically significant. In contrast, the variable concerning the self-assessment of population good health is only significant in the model where the dummies representing the health coverage regimes are not considered. These last variables appear to absorb the effect of population good health on FDI. Our results are consistent with the idea that health is a component of human infrastructure and is influenced by public policies and governments (Globerman and Shapiro, 2002). Both human infrastructure (resources-population health) and governance infrastructure (institutions-health systems) are key features of a country and determine its potential in attracting FDI.