FDI and Labor Markets in General Equilibrium

International wage differences -driven by international technology or factor endowment differences-encourage the flow of Foreign Direct Investment from high- to low-wage countries. However, the access of high-technology firms may drive domestic wages up, dampening the incentives for FDI flows. A general equilibrium model that emphasizes the joint determination of FDI flows and labor market outcomes yield several conclusions. First, an equilibrium with positive FDI inflows and wages above autarky levels is more likely in large labor-abundant technology-backward countries or when the fixed cost of foreign investment is low. Second, the conditions that depress autarky wages -technology differences and labor abundance- are those than enhance the equilibrium wage rate when FDI takes place. Third, FDI rises the relative cost of labor in the host economy, shifting the domestic production structure toward a more capital-intensive mix. Finally, the sectoral distribution of FDI flows does not depend upon differences in factor intensities, and it is solely determined by sectoral differences in the fixed cost of foreign investment.