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German Foreign Direct Investment and Wages

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  • Lochner, Stefan
  • Broll, Udo

Abstract

Over the last decade, German multinationals created about two million jobs abroad with increasing foreign direct investment (FDI). While there are many reasons for firms to go multinational and probably just as many for Germany's high unemployment, this paper aims to investigate the relationship between domestic labour costs and foreign direct investment. We apply a theoretical model for an econometric analysis examining the determinants of FDI using panel data of German firms' foreign capital stocks in 22 countries between 1994 and 2003. Estimating elasticities, we find that while domestic wages do not significantly influence total FDI by German firms, they positively affect the FDI stock in countries where cheap labour is abundant. Thus, although Germany's high labour costs are not the sole driver of foreign direct investment, they may accelerate the outsourcing of German jobs. --

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Bibliographic Info

Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 10/07.

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Date of creation: 2007
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Handle: RePEc:zbw:tuddps:1007

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Keywords: Foreign direct investment; wages; trade; German multinational firms;

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  1. Broll, Udo & Zilcha, Itzhak, 1992. "Exchange rate uncertainty, futures markets and the multinational firm," European Economic Review, Elsevier, vol. 36(4), pages 815-826, May.
  2. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  3. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
  4. Udo Broll & Kit Wong, 2006. "Multinationals, Hedging, and Capital Structure under Exchange Rate Uncertainty," Open Economies Review, Springer, vol. 17(1), pages 103-114, January.
  5. Arijit Mukherjee & Udo Broll, 2007. "Welfare Effects of Foreign Direct Investment: Cost Saving vs. Signaling," Journal of Economics, Springer, vol. 90(1), pages 29-43, January.
  6. Sung, Hongmo & Lapan, Harvey E., 2000. "Strategic Foreign Direct Investment and Exchange Rate Uncertainty," Staff General Research Papers 1335, Iowa State University, Department of Economics.
  7. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
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