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Capital/Labor Substitution, Capital Deepening, and FDI

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  • Juergen Antony

Abstract

Empirical studies show that the elasticity of substitution between capital and labor is larger than one in developed countries but smaller in developing countries. This paper develops a production function which allows for this structure in the elasticity of substitution. The case of a falling real interest rate and capital deepening in the developed countries in the presence of FDI flows from the developed to the developing country is analyzed. It is shown that this structure in the elasticity of substitution can be responsible for a U-shaped relationship between the capital intensity of the developed country and the relative capital intensity of the developing country. This carries over to an inverted U-shaped relationship between the capital intensity of the developed country and FDI profitability.

Suggested Citation

  • Juergen Antony, 2007. "Capital/Labor Substitution, Capital Deepening, and FDI," Discussion Paper Series 295, Universitaet Augsburg, Institute for Economics.
    • Handle: RePEc:aug:augsbe:0295
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    File URL: https://opus.bibliothek.uni-augsburg.de/opus4/files/71139/295.pdf
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    2. Jackson, Tim & Victor, Peter A., 2016. "Does slow growth lead to rising inequality? Some theoretical reflections and numerical simulations," Ecological Economics, Elsevier, vol. 121(C), pages 206-219.
    3. Hector Sala & Pedro Trivín, 2018. "The effects of globalization and technology on the elasticity of substitution," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 617-647, August.
    4. Kemnitz, Alexander & Knoblach, Michael, 2020. "Endogenous sigma-augmenting technological change: An R&D-based approach," CEPIE Working Papers 02/20, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    5. Jürgen Antony, 2010. "A class of changing elasticity of substitution production functions," Journal of Economics, Springer, vol. 100(2), pages 165-183, June.
    6. Petra Maresova & Ivan Soukal & Libuse Svobodova & Martina Hedvicakova & Ehsan Javanmardi & Ali Selamat & Ondrej Krejcar, 2018. "Consequences of Industry 4.0 in Business and Economics," Economies, MDPI, vol. 6(3), pages 1-14, August.
    7. Antony, Jürgen, 2014. "Technical change and the elasticity of factor substitution," Beiträge der Hochschule Pforzheim 147, Pforzheim University.

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    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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