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

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  • Decreuse, Bruno
  • Maarek, Paul

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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Bibliographic Info

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

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Cited by:
  1. Elsa Orgiazzi & Paul Maarek, 2010. "Which factor bears the cost of currency crises?," 2010 Meeting Papers 810, Society for Economic Dynamics.
  2. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2010. "North-South technology transfer in unionised multinationals," Working Papers in Economics 09/10, University of Bergen, Department of Economics.
  3. Maarek, Paul, 2012. "Labor share, informal sector and development," MPRA Paper 38756, University Library of Munich, Germany.
  4. Luciano Boggio & Vincenzo Dall'Aglio & Marco Magnani, 2009. "On Labour Shares in Recent Decades: A Survey," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq0957, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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