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

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Listed author(s):
  • 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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File URL: https://mpra.ub.uni-muenchen.de/11224/1/MPRA_paper_11224.pdf
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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
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. 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.
  2. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2012. "North–South technology transfer in unionised multinationals," Journal of Development Economics, Elsevier, vol. 99(2), pages 385-395.
  3. Katharina van Treeck & K.M. Wacker, 2017. "Financial Globalization and the Labor Share in Developing Countries: The Type of Capital Matters," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 219, Courant Research Centre PEG.
  4. Maarek, Paul, 2012. "Labor share, informal sector and development," MPRA Paper 38756, University Library of Munich, Germany.
  5. 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.
  6. Elsa Orgiazzi & Paul Maarek, 2010. "Which factor bears the cost of currency crises?," 2010 Meeting Papers 810, Society for Economic Dynamics.
  7. Paul Maarek & Elsa Orgiazzi, 2014. "Labor Share and development," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201410, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  8. 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.
  9. 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).

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