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The impact of foreign direct investment on the relative return to skill

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  • Xiaodong Wu

Abstract

Since the early 1980s, China has adopted favourable economic policies to attract FDI in order to facilitate technology development. Since inward FDI induces either sector‐ or factor‐biased technical progress, the impact of FDI on the distribution of income between skilled and unskilled labour is not trivial. This paper introduces vertical product differentiation to analyze the impact of FDI on the return to skill and concludes that, for a labour abundant country, this impact depends on whether the FDI‐induced technology transfer is skill‐ or labour‐biased, regardless of which sector receives FDI. The analysis shows that FDI with relatively labour‐biased technology will decrease the wage gap while FDI with relatively skill‐biased technology will increase the profit margin of the host country’s exports as well as its wage gap. The findings provide policy insights for FDI recipient countries in balancing wage growth between skilled and unskilled workers by managing inward FDI with relatively labour‐biased and skill‐biased technologies. This is particularly important for China given the expected further increase of inward FDI following its imminent membership of the WTO. JEL classification: F23, J31, P33.

Suggested Citation

  • Xiaodong Wu, 2001. "The impact of foreign direct investment on the relative return to skill," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(3), pages 695-715, November.
    • Handle: RePEc:bla:etrans:v:9:y:2001:i:3:p:695-715
    DOI: 10.1111/1468-0351.00096
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    Cited by:

    1. Pi, Jiancai & Zhou, Yu, 2014. "Foreign capital, public infrastructure, and wage inequality in developing countries," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 195-207.
    2. Ann Owen & Bing Yu, 2007. "Regional differences in wage inequality across industries in China," Applied Economics Letters, Taylor & Francis Journals, vol. 15(2), pages 113-116.
    3. Pi, Jiancai & Zhou, Yu & Yin, Jun, 2013. "International factor mobility, monopolistic competition, and wage inequality," Economic Modelling, Elsevier, vol. 33(C), pages 326-332.
    4. Kuo‐Hsing Kuo & Shang‐Fen Wu & Cheng‐Te Lee, 2022. "The impact of environmental policy on wage inequality," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 472-485, December.
    5. Pi, Jiancai & Zhang, Pengqing, 2017. "Foreign capital, pollution control, and wage inequality in developing countries," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 280-288.
    6. Toma Lankauskienė & Manuela Tvaronavičienė, 2011. "Interrelation of countries' developmental level and foreign direct investments performance," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 12(3), pages 546-565, March.
    7. Sugandha Huria & Manoj Pant, 2018. "Foreign direct investment, welfare and wage inequality in a small open economy: theory and empirics," Indian Economic Review, Springer, vol. 53(1), pages 131-166, December.

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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