FDI and the labor share in developing countries: a theory and some evidence

Decreuse, Bruno and Maarek, Paul (2008): FDI and the labor share in developing countries: a theory and some evidence.

Abstract

This paper addresses the impact of FDI on the labor share of income in developing countries. We propose a theory that relies on the impacts of FDI on productive heterogeneity between firms in a frictional labor market. We argue that FDI have two opposite effects on the labor share: a negative force originated by market power and technological advance, and a positive force due to increased labor market competition between firms. Then, we test this theory on aggregate panel data through fixed effects and system-GMM estimations. We find a quantitatively meaningful U- shaped relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. However, most of the countries are stuck in the decreasing part of the curve, which we relate to multinationals' location choices.

• Item Type: MPRA Paper
• Language: English
• Keywords: FDI; Matching frictions; Firm heterogeneity; Technological advance
• Subjects: F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements

References

Albrecht, J., Gautier, P., Vroman, S., 2006. Equilibrium directed search with multiple applications. Review of Economic Studies 73, 869-891

Aitken, B., Harrison, A., Lipsey, R., 1996. Wages and foreign ownership: A comparative study of Mexico, Venezuela, and the United States. Journal of International Economics 40, 345-371

Bartelsman, E.J., Beetsma, R., 2003. Why pay more? Corporate tax avoidance through transfer pricing in OECD countries. Journal of Public Economics 87, 2225-2252

Basu, P., Guariglia, A., 2006. Foreign Direct Investment, inequality and growth. Journal of Macroeconomics, forthcoming

Bernanke, B.S., Gürkaynak, R.S., 2001. Is growth exogenous? Taking Mankiw, Romer, and Weil seriously. In Bernanke, B.S. and Rogo¤, K., Eds., NBER Macroeconomics Annual, Cambridge, MA, MIT Press, 11-57

Blanchard, O.J., Giavazzi, F., 2003. Macroeconomic effects of regulation and deregulation on goods and labor markets. Quarterly Journal of Economics 118, 879-908

Blomström, M., Kokko, A., 2003. The Economics of Foreign Direct Investment incentives. EIJS working paper series 168

Blonigen, B., Slaughter, M., 2001. Foreign a¢ liate activity and US skill upgrading. Review of Economics and Statistics 83, 362-376

Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87, 115-143

Chinn, M., Ito, H., 2006. Notes on the calculation of the Chinn-Ito financial openness variable. Mimeo

Das, S.P., 2005. Gradual globalisation and inequality between and within countries, Canadian Journal of Economics 38, 852-69

Daudey, E., 2005. The sharing of value-added: data sources. Mimeo

Davidson, C., Martin, L., Matusz, S., 1999. Trade and search generated unemployment. Journal of International Economics 48, 271-299

Davidson, C., Matusz, S., 2006a. Long-run lunacy, short-run sanity: a simple model of trade with labor market turnover. Review of International Economics 14, 261-276

Davidson, C., Matusz, S., 2006b. Trade liberalization and compensation. International Economic Review 47, 723-747

Davidson, C., Matusz, S., Shevchenko, A., 2006. Outsourcing Peter to pay Paul: high skill expectations and low-skill wages and imperfect labor markets. Mimeo

Davis, D., Harrigan, J., 2007. Good jobs, bad jobs and trade liberalization. Mimeo

Decreuse, B., Maarek, P., 2008. FDI and the labor share in developing countries: A theory and some evidence. GREQAM working paper No 2008-17

Diwan, I., 2000. Debt as sweat: labor, �nancial crises, and the globalization of capital. Mimeo

Diwan, I., 2002. The labor share during financial crises: new results. Mimeo

Duffy, J., Papagiorgiou, C., 2000. A cross-country empirical investigation of the aggregate production function speci�cation. Journal of Economic Growth 5, 87-120

Egger, H., Kreickemeier, U., 2006. Firm heterogeneity and the labour market effects of trade liberalization. GEP Research Paper 2006/26

Feenstra, R., Hanson, G.H., 1997. Foreign direct investment and relative wages: evidence from Mexico's maquiladoras. Journal of International Economics 42, 371-393

Figini, P., Görg, H., 2006. Does Foreign Direct Investment a¤ect wage inequality? An empirical investigation. IZA DP 2336

Gollin, D., 2001. Getting income shares right. Journal of Political Economy 110, 458-475

Gopinath, M., Chen, W., 2003. Foreign Direct Investment and wages: a cross-country analysis. Journal of International Trade and Economic Development 12, 285-309

Harrison, A.E., 2002. Has globalization eroded labor's share? Some cross-country evidence. Mimeo

Harrison, A.E., McMillan, M., 2003. Does direct foreign investment a¤ect domestic firm constraints? Journal of International Economics 61, 73-100

Helpman, E., Itskhoki, O., 2007. Labor market rigidities, trade and unemployment. NBER working paper 13365

Helpman, E., Melitz, M.J., Yeaple, S.R., 2004. Export vs FDI with heterogenous firms. American Economic Review 94, 300-316

Hines, J.R., 1997. Tax policy and the activities of multinational corporations. In Auerbach, A.J., Ed., Fiscal policy: lessons from economic research, Cambridge, MIT Press

Hines, J.R., 1999. Lessons from behavioral responses to international taxation. National Tax Journal 52, 305-332

Jayadev, A., Lee, K., 2005. Capital account openness and its e¤ects on growth and distribution: review of the cross country evidence. In Epstein, G., Ed., Capital flight and capital controls in developing countries, Edward Elgar

Klenow, P., Rodriguez-Clare, A., 2005. Externalities and growth. Handbook of Economic Growth, vol. 1A, Aghion, P., Durlauf, S., eds, 817-861 (chapter 11) 27

Lane, Ph., Milesi-Ferretti, G.M., 2007. The external wealth of nations mark II: revised and extended estimates of foreign assets and liabilities. Journal of International Economics 73, 223-250

Liang, W.J., Mai, C.C, 2003. Capital �ows, vertical multinationals, wage inequality, and welfare. Review of Development Economics 7, 599-603

Marjit, S., Beladi, H., Chakrabarti, A., 2004. Trade and wage inequality in developing countries. Economic Inquiry 42, 295-303

Mitra, P., Ranjan, P., 2007. Can offshoring reduce unemployment? Mimeo

Moore, M., Ranjan, P., 2005. Globalisation vs skill-biased technological change: implications for unemployment and wage inequality. Economic Journal 115, 391-422

Ortega, D., Rodriguez, F., 2002. Openness and factor shares. Mimeo

Ortega, D., Rodriguez, F., 2006. Are capital shares higher in poor countries? Evidence from indus- trial surveys. Wesleyan Economics WP 2006-023

Pissarides, C., 2000. Equilibrium Unemployment Theory. MIT Press, 2nd edition

Rodrik, D., 1997. Has globalization gone too fare? Institute for International Economics

Roodman, D., 2006. How to do xtabond2: an introduction to Difference and System-GMM in Stata. Center for Global Development, WP 103

Sachs, J., 1998. Globalization and employment. A public lecture for the international institute for labor studies

Taylor, K., Driffield, N., 2005. Wage inequality and the role of multinationals: evidence from UK panel data. Labour Economics 12, 223-49

Tsai, P.L., 1995. Foreign Direct Investment and income inequality: further evidence. World Development 23, 469-83

Wooldridge, J., 2003. Cluster-sample methods in Applied Econometrics. American Economic Review 93, 133-138