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Foreign Direct Investment and International Skill Inequality

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  • Dirk Willem Te Velde
  • Theodora Xenogiani

Abstract

This paper focuses on the effects of foreign direct investment (FDI) on skill inequality amongst countries. New growth models and international business studies predict that when countries liberalize their trade and investment regime in an environment of imperfect technology transfers, they will specialize in activities depending on the initial conditions such as skill endowments. Countries with few skills tend to specialize in low-skill intensive production, while countries with a high innovation rate and skill endowment tend to specialize in the production of high-skill intensive goods. The econometric evidence, based on an unbalanced panel for 111 countries over seven 5-year time periods from 1970 to 2000, confirms that FDI enhances skill development (particularly secondary and tertiary enrolment) in countries that are relatively well endowed with skills to start with. There are important policy conclusions for national governments when FDI tends to raise international skill inequalities. In particular, developing countries with low-skill endowments that attract investors would do well to co-ordinate actively their human resources policies with investor needs in order to bring the country to a higher skill path.

Suggested Citation

  • Dirk Willem Te Velde & Theodora Xenogiani, 2007. "Foreign Direct Investment and International Skill Inequality," Oxford Development Studies, Taylor & Francis Journals, vol. 35(1), pages 83-104.
  • Handle: RePEc:taf:oxdevs:v:35:y:2007:i:1:p:83-104
    DOI: 10.1080/13600810601167603
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    Cited by:

    1. Laura Alfaro & Sebnem Kalemli-Ozcan & Selin Sayek, 2009. "FDI, Productivity and Financial Development," The World Economy, Wiley Blackwell, vol. 32(1), pages 111-135, January.
    2. Metaxas, Theodore & Kechagia, Polyxeni, 2016. "Literature review of 100 empirical studies of Foreign Direct Investment: 1950-2015," MPRA Paper 71414, University Library of Munich, Germany.
    3. Doner, Richard, 2012. "Success as Trap? Crisis Response And Challenges To Economic Upgrading in Export-Oriented Southeast Asia," Working Papers 45, JICA Research Institute.

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