Cross-border Economic Activities, Human Capital and Efficiency: A Stochastic Frontier Analysis for OECD Countries

We study the growth effects of outward oriented economies by using stochastic frontier analysis to measure the efficiency externalities of three forms of economic cross-border activities – international trade, FDI and migration – for OECD countries. The study also examines whether the efficiency of these cross border activities is affected by the level of human capital in the host country. We find that international trade and FDI are important channels for improving efficiency, as is human capital accumulation, and that the positive effects of international trade, FDI, and migration depend crucially on the level of accumulated human capital. Our results show that the impact of human capital is important for increasing efficiency via international trade flows and FDI flows, while immigration into countries that are richer in human capital enhances their efficiency relatively more than immigration into countries with lower human capital. These results remain robust to alternate measures of human capital, controls on education levels among immigrants, and to a nonparametric estimation of the model.