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Journal Article

FDI and the Labor Share in Developing Countries: A Theory and Some Evidence

Bruno Decreuse and Paul Maarek
Annals of Economics and Statistics
No. 119/120, SPECIAL ISSUE ON HEALTH AND LABOUR ECONOMICS (December 2015), pp. 289-319
Published by: GENES on behalf of ADRES
DOI: 10.15609/annaeconstat2009.119-120.289
Stable URL: http://www.jstor.org/stable/10.15609/annaeconstat2009.119-120.289
Page Count: 31
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FDI and the Labor Share in Developing Countries: A Theory and Some Evidence
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Abstract

We address the effects of FDI on the labor share in developing countries. Our theory relies on the impacts of FDI on wage and labor productivity in a frictional labor market. FDI has two opposite effects on the labor share: a negative force originated by technological advance, and a positive force due to increased labor market competition between firms. We test this theory on aggregate panel data through fixed effects and IV estimates. We examine the relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. We show that FDI has decreased the labor share in the host countries of our dataset. This impact amounts to between 10% to 20% of the mean labor share in our sample. JEL: E25, F16, F21. / KEY WORDS: FDI, Matching Frictions, Firm Heterogeneity, Technological Advance.

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