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Foreign direct investment and wages: a cross-country analysis

Author

Listed:
  • Munisamy Gopinath
  • Weiyan Chen

Abstract

While globalization has led to overall economic growth in a number of countries, questions abound on its distributional effects, especially on rising wage inequality across nations. The main objective of this study is to investigate empirically the effects of foreign direct investment (FDI) on wages in a cross-country setting. We investigate the general equilibrium propositions that capital inflows (outflows) increase (lower) wages in host (home) countries due to the change in relative factor endowments. We also explore whether capital inflows have differential impacts on skilled and unskilled wages in developing economies. Time-series data on 26 countries, 15 developed and 11 developing, are used to fit the labour share equation derived from a translog GNP function with net FDI stock as one of its arguments. Results confirm that capital movement brings about a cross-country convergence of wages. However, there is some evidence that inward FDI flows increase the wage gap between skilled and unskilled workers in developing countries.

Suggested Citation

  • Munisamy Gopinath & Weiyan Chen, 2003. "Foreign direct investment and wages: a cross-country analysis," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 12(3), pages 285-309.
  • Handle: RePEc:taf:jitecd:v:12:y:2003:i:3:p:285-309
    DOI: 10.1080/0963819032000132067
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    References listed on IDEAS

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    1. Jagdish Bhagwati, 1996. "Political Economy And International Economics: Jagdish Bhagwati," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522187 edited by Douglas A. Irwin, March.
    2. Richard E. Baldwin & Philippe Martin, 1999. "Two Waves of Globalisation: Superficial Similarities, Fundamental Differences," NBER Working Papers 6904, National Bureau of Economic Research, Inc.
    3. Robert E. Lipsey, 1995. "Outward Direct Investment and the U.S. Economy," NBER Chapters,in: The Effects of Taxation on Multinational Corporations, pages 7-42 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Paolo Figini & Holger Go¨rg, 2011. "Does Foreign Direct Investment Affect Wage Inequality? An Empirical Investigation," The World Economy, Wiley Blackwell, vol. 34(9), pages 1455-1475, September.
    2. Stephanie Seguino, 2005. "Gender Inequality in a Globalizing World," Economics Working Paper Archive wp_426, Levy Economics Institute.
    3. Bruno Decreuse & Paul Maarek, 2015. "FDI and the Labor Share in Developing Countries : A Theory and Some Evidence," Annals of Economics and Statistics, GENES, issue 119-120, pages 289-319.
    4. Seguino, Stephanie, 2007. "Is more mobility good?: Firm mobility and the low wage-low productivity trap," Structural Change and Economic Dynamics, Elsevier, vol. 18(1), pages 27-51, March.
    5. Sadullah Çelik & Ulkem Basdas, 2010. "How Does Globalization Affect Income Inequality? A Panel Data Analysis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(4), pages 358-370, November.
    6. Cristina Procházková Ilinitchi, 2010. "Selected Migration Theories and their Importance on Drawing Migration Policies," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2010(6), pages 3-26.
    7. repec:kap:iaecre:v:16:y:2010:i:4:p:358-370 is not listed on IDEAS
    8. repec:gam:jecomi:v:5:y:2017:i:4:p:36-:d:113052 is not listed on IDEAS
    9. Wu, Jyun-Yi & Hsu, Chih-Chiang, 2012. "Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?," Economic Modelling, Elsevier, vol. 29(6), pages 2183-2189.
    10. Masahiro Endoh, 2012. "Return Differentials of Foreign Investment among OECD Countries," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-016, Keio/Kyoto Joint Global COE Program.
    11. Valentina HARTARSKA & Henry THOMPSON, 2008. "Foreign Investment and Transition in Central/Eastern Europe along the Phase Curve," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(2), pages 67-78.
    12. Wu, JunJie & Gopinath, Munisamy, 2005. "How Do Location Decisions of Firms and Households Affect Economic Development in Rural America?," 2005 Annual meeting, July 24-27, Providence, RI 19229, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    13. Thi Hong Hanh Pham, 2015. "Income Inequality and Foreign Aid," Working Papers hal-01158240, HAL.
    14. Seguino, Stephanie, 2006. "The Road to Gender Equality: Global Trends and the Way Forward," MPRA Paper 6510, University Library of Munich, Germany.
    15. repec:wsi:serxxx:v:62:y:2017:i:05:n:s0217590815500678 is not listed on IDEAS
    16. Fatima, Syeda Tamkeen, 2014. "Off-Shoring and Wage Inequality: where do we stand?," IEE Working Papers 207, Institut fuer Entwicklungsforschung und Entwicklungspolitik, Ruhr-Universitaet Bochum.

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