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

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Author Info
Decreuse, Bruno
Maarek, Paul

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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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11224.

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Date of creation: Oct 2008
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Handle: RePEc:pra:mprapa:11224

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Related research
Keywords: FDI; Matching frictions; Firm heterogeneity; Technological advance;

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Find related papers by JEL classification:
F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
E25 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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