2.1.1 Human Capital Theory
Institutional economics explores the intricate relationship between education and economic outcomes (Vaizey, 1962; Schultz, 1981; Johnes, 1993). According to human capital theory, investments in people offer economic advantages to both individuals and society, with a crucial distinction between human capital expenditures and consumptive expenditures (Vaizey, 1962). While health and nutrition constitute common forms of human capital investment (Schultz, 1981), empirical investigations often emphasize education as the most crucial area (Schultz, 1963).
The literature on human capital theory distinguishes various forms and methods of education, including formalized education at different levels, informal education, on-the-job training, and vocational education (Cohn & Geske, 1990; Schultz, 1981; Mincer, 1974; Corazzini, 1967). These diverse forms significantly influence the research design of studies on human capital, with a reasonable assumption that education enhances individuals' economic capabilities in most instances (Schultz, 1971). Due to rapid changes in society, there have been created testing environments for human capital forcing company management into a rapid movement within the "unknown fields" (Dervishaj & Neziraj, 2022).
The extensive body of research highlights the importance of human capital theory. In 1966, Blaug cataloged 792 articles, books, and research projects related to education economics, with the number surpassing 2,000 by 1976 (Blaug, 1970). Notably, the theory's connection to Nobel Prize recognition is remarkable, with five prizes awarded since 1971 to scientists involved in or associated with human capital theory (Becker, 1993; Wright, 1992).
The Nobel distinction is attributed to key figures in human capital theory, including Theodore W. Schultz and Gary S. Becker, prominent scholars; Milton Friedman and Simon Kuznets (1945), collaborators on a significant article connecting medical professionals' incomes with education investments; and Solow (1957), pivotal in highlighting the relationship between education and the overall production function.
Despite its significance, human capital theory faces criticism for oversimplifying the intricate relationship between education, training, and economic outcomes. The theory falls short in acknowledging various factors impacting earning potential, such as discrimination, economic downturns, and shifts in labor market conditions. Additionally, it assumes easy investment access, overlooking barriers like unequal education and training opportunities that can exacerbate income inequality. The theory predominantly focuses on economic aspects, neglecting the non-market value of education, encompassing personal growth, societal well-being, and cultural development. This oversight results in a failure to consider the positive externalities associated with education and training, which benefit both individuals and society, leading to lower crime rates, improved healthcare outcomes, and overall societal well-being.
Human capital theory's relevance extends to sustainability and its impact on diminishing gender inequality, particularly concerning foreign direct investment (FDI) on wage dynamics. The theory emphasizes the significance of education and training in enhancing an individual's productivity and earning potential. In the context of gender inequality, investing in women's education and skills development becomes imperative. When FDI aligns with initiatives augmenting education and skills for both male and female workers, it plays a crucial role in narrowing the gender wage gap.
A central tenet of human capital theory is the equitable distribution of human capital investments, with FDI playing a pivotal role in influencing gender equality. FDI offers opportunities for women to access education, training, and employment in traditionally male-dominated sectors, contributing to a more balanced allocation of human capital and reducing wage disparities. Furthermore, human capital theory posits that investments in education and skills development can spur economic growth. When FDI supports sustainable projects that generate employment and enhance human capital, it stimulates economic development in host countries, creating opportunities for women to participate in the labor force and secure higher wages. However, it is crucial to note that the impact of FDI on wage dynamics may not be uniform for both men and women.
Human capital theory provides a framework for assessing how FDI impacts wage dynamics differently for male and female workers while revealing gender-based wage disparities. FDI typically involves knowledge and skills transfer to workers in the host country, enhancing the productivity of all workers, including women. In cases where FDI projects actively promote gender-inclusive skill transfers, there is potential to reduce gender wage disparities. The theory underscores the importance of acquiring skills in demand in the labor market, creating opportunities for both men and women to access high-paying jobs in industries with a higher demand for skilled labor. This contributes to narrowing the gender wage gap by enhancing women's access to well-paying positions.
Institutional economics emphasizes that "institutions matter" when examining economic systems. These institutions, encompassing both official and informal regulations, play a central role in investigative efforts (Raudla, 2014). The roots of institutional economics trace back to two prominent schools of thought: the German historical school, including figures like Gustav von Schmoller, Wilhelm Roscher, Werner Sombart, and Max Weber, and the American institutionalist school, with notable figures like John Commons, Thorstein Veblen, and Wesley Mitchell (Medema et al., 1999; Rutherford, 1994).
The New Institutional Economics (NIE) is an interdisciplinary field drawing from economics, law, organization theory, political science, sociology, and anthropology, aiming to provide insights into the institutions shaping social, political, and commercial existence. While it draws from multiple social sciences, its primary framework remains rooted in economics. NIE seeks to clarify the nature of institutions, how they come into being, the purposes they serve, the mechanisms behind their evolution, and whether alterations are necessary.
The term "institutional economics" was initially associated with scholars like Thorstein Veblen, John R. Commons, Wesley C. Mitchell, and Clarence Ayres. Despite the diversity in their work, it centers around key themes involving critiques of conventional economics, shifting the focus from individual to collective actions, embracing an "evolutionary" approach to the economy, and prioritizing empirical observation over deductive reasoning (Seckler, 1975; Gruchy, 1972; Langlois, 1989).
Richter (1996) delves into the German origins of American institutionalism, revealing significant contributions by earlier institutionalist thinkers. However, many contemporary economists remain unfamiliar with these contributions, exemplified by the dismissive treatment of Coase (1984) who was often regarded as having little more to offer than descriptive material awaiting a theoretical framework.
Williamson (1975) introduced the term "new institutional economics" (NIE), rooted in Coase's analysis of the firm (1937), Hayek's discussions on knowledge (1937, 1945), and Chandler's examination of industrial enterprise (1962). Notable contributions also came from scholars like Simon (1947), Arrow (1963), Davis and North (1971), Alchian and Demsetz (1972), Williamson (1973), and others (1971). Prominent figures associated with NIE include Coase, Williamson, and North, with additional work by scholars like Eggertsson (1990), Furubotn and Richter (1991), Coase (1992), Werin and Wijkander (1992), Macneil (1978), Holmström (1979), and others.
The new institutional economics, much like its predecessor, focuses on examining social, economic, and political institutions governing daily lives. However, it takes a different approach by distancing itself from the holistic perspective of the older school, adhering to a form of methodological individualism. NIE recognizes the importance of social phenomena but frames explanations in the context of individuals' goals, plans, and behaviors. Despite this, it acknowledges social phenomena such as corporate culture and organizational memory, regarding them as subjects to be explained rather than the basis for explanations.
NIE differs from orthodox neoclassical economics, emphasizing the need for policy analysis guided by "comparative institutional analysis" (Coase, 1964). Institutional economics plays a crucial role in understanding the connection between sustainability and the reduction of gender inequality, especially when assessing the effects of foreign direct investment (FDI) on wage dynamics. This field underscores the importance of institutions, encompassing both formal laws and regulations and less tangible aspects like informal norms, customs, and organizational structures. When scrutinizing gender inequality, understanding the institutional framework within the host country becomes imperative, influencing efforts to diminish gender inequality.
Institutional economics underlines the paramount importance of property rights and contracts in facilitating economic transactions, crucial when examining the influence of FDI on wage dynamics. Safeguarding property rights and enforcing labor contracts are pivotal in ensuring equitable wages and working conditions, irrespective of gender. Different nations have diverse regulatory frameworks pertaining to labor and gender equality, impacting both FDI and wage dynamics. Institutional economics also considers the evolution of institutions over time.
The study of sustainability often involves evaluating whether FDI leads to alterations in host country institutions fostering gender equality. Institutional economics recognizes the significant influence of cultural norms and social capital on economic outcomes. When investigating gender inequality and FDI, understanding the cultural context is crucial, as different norms can impact how women are treated in the workforce, affecting wage dynamics. Institutional economics assists in uncovering power imbalances within institutions, a key driver of gender inequality. FDI can either exacerbate or mitigate power imbalances, and comprehending these dynamics is crucial for a thorough analysis of gender-related impacts. Sustainability requires assessing the long-term impact of FDI-induced changes in wage dynamics, a task facilitated by institutional economics.