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FDI and the labor share in developing countries: a theory and some evidence

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  • Decreuse, Bruno
  • Maarek, Paul

Abstract

This paper addresses the impact of FDI on the labor share of income in developing countries. We propose a theory that relies on the impacts of FDI on productive heterogeneity between firms in a frictional labor market. We argue that FDI have two opposite effects on the labor share: a negative force originated by market power and technological advance, and a positive force due to increased labor market competition between firms. Then, we test this theory on aggregate panel data through fixed effects and system-GMM estimations. We find a quantitatively meaningful U- shaped relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. However, most of the countries are stuck in the decreasing part of the curve, which we relate to multinationals' location choices.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11224.

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Date of creation: Oct 2008
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Handle: RePEc:pra:mprapa:11224
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Keywords: FDI; Matching frictions; Firm heterogeneity; Technological advance;

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Find related papers by JEL classification:
  • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
  • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
  • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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Cited by:

  1. Paul Maarek, 2012. "Labor share, Informal sector and Development," THEMA Working Papers 2012-34, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Kjell Erik Lommerud & Frode Meland & Odd Rune Straume, 2010. "North-South technology transfer in unionised multinationals," NIPE Working Papers 35/2010, NIPE - Universidade do Minho.
  3. Josef C. Brada & El-hadj Bah, 2014. "Growing Income Inequality as a Challenge to 21st Century Capitalism," a/ Working Papers Series 1402, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
  4. Paul Maarek & Elsa Orgiazzi, 2015. "Development and the labor share," THEMA Working Papers 2015-09, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  5. Brada, Josef C., 2013. "The distribution of income between labor and capital is not stable: But why is that so and why does it matter?," Economic Systems, Elsevier, vol. 37(3), pages 333-344.
  6. Luciano BOGGIO & Vincenzo DALL’AGLIO & Marco MAGNANI, 2010. "On Labour Shares in Recent Decades: A Survey," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 118(3), pages 283-333.

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