THE EFFECT OF FOREIGN DIRECT INVESTMENT ON LABOR INCOME: EVIDENCE FROM OECD COUNTRIES

Year 2012, Volume: 4 Issue: 1, 51 - 60, 01.06.2012

Cem Tintin

Abstract

This study investigates whether and to what extent Foreign Direct Investment (FDI) affects labor income in fourteen OECD countries by using a panel approach over the 1990-2010 period. The study uses three labor income measures: average annual wage, statutory annual minimum wage and labor income share. By using different income measures the study identifies to what extent the effect of FDI differs on different classes of labor (i.e. average wage earners versus minimum wage earners). The estimation results show that FDI increases labor income in OECD countries. Both the average and the minimum wage earners benefit from FDI. However, the positive effect of FDI is distributed unevenly between average and minimum wage earners. It implies that FDI can widen the labor income gap between the average and minimum wage earners in OECD countries. Such an effect of FDI on the different classes of labor should be considered by policy makers while designing and following pro FDI policies

Keywords

Foreign Direct Investment, Labor Income, Wage, Productivity

References

• Aitken Brian, Harrison Ann and Lipsey Robert (1996), “Wages and Foreign Ownership A Comparative Study of Mexico, Venezuela, and the United States”, Journal of International Economics, Vol. 40, No.3, pp. 345-371.
• Das, Satya. P. (2002), “Foreign Direct Investment and the Relative Wage in a Developing Country”, Journal of Development Economics, Vol. 67, No.1, pp. 55- 77.
• Decreuse Bruno and Maarek Paul (2008), “FDI and the Labor Share in Developing Countries: A Theory and Some Evidence”, GREQAM Working Papers, No.17.
• Eckel Carsten and Egger Hartmut (2009), “Wage Bargaining and Multinational Firms”, Journal of International Economics, Vol. 77, No. 2, pp. 206-214.
• Gopinath Munisamy and Chen Weiyan (2003), “Foreign Direct Investment and Wages: A Cross-Country Analysis”, Journal of International Trade & Economic Development, Vol. 12, No. 3, pp. 285-309.
• Gorg, Holger and Greenaway David (2004), “Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment”, The World Bank Research Observer, Vol. 19, No. 2, pp.171-197.
• Lipsey, Robert E. (2004), “Home- and Host-Country Effects of Foreign DirectInvestment”, (in Baldwin Richard, and Winters Alan. -Ed., Challenges to Globalization: Analyzing the Economics), Chicago: University of Chicago Press.
• Lipsey Robert E. and Sjoholm Fredrik (2004), “Foreign Direct Investment, Education and Wages in Indonesian Manufacturing”, Journal of Development Economics, Vol.73, No.1, pp. 415-422.
• Majid Nomaan (2004), “What is the Effect of Trade Openness on Wages”, ILO Employment Strategy Papers, No. 2004/18. Meyer, Klaus. E. (2004), “Perspectives on Multinational Enterprises in Emerging Economies”, Journal of International Business Studies, Vol.35, No. 4, pp. 259- 276.
• OECD (2002), Foreign Direct Investment for Development; Maximizing Benefits,Minimizing Costs, Paris: OECD.
• OECD (2008), “Do Multinationals Promote Better Pay and WorkingConditions?”, OECD Employment Outlook, Paris: OECD. Onaran Ozlem and Stockhammer Engelbert (2008), “The Effect of FDI and Foreign Trade on Wages in the Central and Eastern European Countries in the Post-Transition Era: A Sectoral Analysis for the Manufacturing Industry”, Structural Change and Economic Dynamics, Vol.19, No.1, pp. 66-80.
• Onaran Ozlem and Stockhammer Engelbert (2009), “National and Sectoral Influences on Wage Determination in Central and Eastern Europe”, European Journal of Industrial Relations, Vol. 15, No. 3, pp. 317-338.
• Seguino Stephanie (2007), “Is More Mobility Good? Firm Mobility and the Low Wage Low Productivity Trap”, Structural Change and Economic Dynamics, Vol. 18, No. 1, pp. 27-51.
• Stehrer Robert and Woerz Julia (2009), “Attract FDI A Universal Golden Rule? Empirical Evidence for OECD and Selected Non-OECD Countries”, European Journal of Development Research, Vol. 21, No.1, pp. 95-111.
• Stiglitz Joseph (2000), “Capital Market Liberalization, Economic Growth, and Instability”, World Development, Vol. 28, No. 6, pp.1075-1086.
• Vijaya Ramya M. and Kaltani Linda (2007), “Foreign Direct Investment and Wages: A Bargaining Power Approach”, Journal of World-Systems Research, Vol. 3, No.1, pp. 83-95.