Foreign direct investment, productivity, demand for skilled labour and wage inequality: an analysis for Uruguay

This work analyses the impact of foreign direct investment (FDI) on productivity, the demand for skilled labour and wage inequality of the Uruguayan Manufacturing firms for the period 1997-2005. Firstly, we estimate the effects of FDI on productivity, relative wages and relative employment of skilled workers, through conventional pooled OLS. Then, we estimate quantile regressions, which reveal that consistently with firm heterogeneity, the response to foreign ownership is not homogenous, but varies over the conditional distribution of each dependent variable. Nevertheless, since we cannot attribute causality from the previous correlations we use discrete treatment effect techniques for analyzing causality. Our preliminary results seem to indicate that FDI is associated with higher productivity and an increased demand for skilled labour. Furthermore, though average wages are higher in foreign owned firms, the wage gap between skilled and unskilled workers is higher in foreign owned firms than in domestic ones. Then, it follows that promoting foreign investment enhances productivity. On the other hand, due to the higher demand for skilled workers policies such as training of workers would be conductive to further productivity improvements, while other social policies could help to mitigate wage inequality effects.