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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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  • Decreuse, Bruno & Maarek, Paul, 2008. "FDI and the labor share in developing countries: a theory and some evidence," MPRA Paper 11224, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11224
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    More about this item

    Keywords

    FDI; Matching frictions; Firm heterogeneity; Technological advance;
    All these keywords.

    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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