FDI, wage inequality and employment in emerging economies: recent evidence from Indian manufacturing

The increased integration of developing countries with the global economy has seen a remarkable increase in foreign capital over the years. While the increasing momentum of FDI capital in the manufacturing of the emerging economies has left several questions unanswered, we focus our discussion on the trends in employment and wage inequality in context of developing economies. The empirical evidence in this regard is drawn from the Indian manufacturing by using the recent firm level panel data. It draws attention to the determinants of wage rate and employment in Indian manufacturing vis-à-vis the foreign and the domestic affiliates during the period 2001-02 to 2007-08. While empirical evidence in regard to developing countries provides a mixture of results, our analysis broadly concludes that for the entire manufacturing and the domestic affiliates, capital intensity was the most dominant factor in determining the wage rate. On the other hand the high output per worker and foreign ownership played the most prominent role in determining the wage rate of the foreign affiliates during our study period. Similarly, it is observed that the employment performance of the firm is less in high capital intensive firms, whereas the size and the rate of profit of the entire manufacturing and its subgroups are observed positive and significant in determining the employment.