Human Capital, Connectivity and FDI Inflows in the Philippines: A Two-stage Least Squares Analysis

Abstract

Aims: To examine the influence of local road infrastructure and educational attainment on Foreign Direct Investment (FDI) inflows in the Philippines. Specifically, the study aims to assess how human capital and connectivity interact to attract foreign investment, while addressing endogeneity and simultaneity bias among the variables through a Two-Stage Least Squares (2SLS) regression approach. Study Design: A quantitative econometric study utilizing the Two-Stage Least Squares (2SLS) regression model to establish causal relationships among education, infrastructure, and FDI. Place and Duration of Study: Conducted in the Philippines using national and regional macroeconomic data derived from the Philippine Statistics Authority (PSA), Department of Public Works and Highways (DPWH), and World Bank databases covering multiple fiscal years. Methodology: The study employed a 2SLS regression technique to estimate the effects of educational attainment (proxy for human capital) and local road infrastructure (proxy for connectivity) on FDI inflows. The first stage modeled educational attainment as a function of FDI and regional GDP, while the second stage regressed FDI on the predicted values of education and road infrastructure. Statistical analyses included t-tests, p-values, and R² measures to determine significance and model fit. Results: Findings revealed that educational attainment has a strong, positive, and statistically significant effect on FDI (p < 0.001), indicating that a more educated workforce enhances the country’s attractiveness to foreign investors. Local road infrastructure also demonstrated a positive relationship with FDI (p < 0.05), emphasizing the importance of connectivity in facilitating trade and investment. The model explained 40.20% of the variation in FDI (R² = 0.4020) in the OLS regression and 74.77% in the second-stage 2SLS model, confirming robustness. Prob > F values (0.000) further indicated high overall significance. Conclusion: Educational attainment and infrastructure quality are critical determinants of FDI inflows in the Philippines. A skilled labor force and efficient transport networks collectively strengthen the country’s investment climate. Policymakers are urged to prioritize education reform, vocational training, and regional road development to sustain inclusive economic growth. The study validates the 2SLS approach as a reliable framework for examining causal relationships in FDI determinants and recommends expanding future research to include political stability, digital infrastructure, and innovation capacity.