Global Players – Global Markets
- International Institutions and Global Governance series
Edited by John-ren Chen
7. Foreign direct investment and wages V.N. Balasubramanyam and David Sapsford INTRODUCTION Perhaps much more has been written on foreign direct investment (FDI) in the development process than on any other aspect of development economics. This should be of little surprise; the characteristics of FDI, its rapid growth and pivotal role in the process of globalisation in recent years, its intimate relationship with trade and its historical antecedents pose a variety of important and relevant researchable issues. These include the determinants of FDI, its impact on growth, trade, technical change and income distribution in the host countries. Wages, as the return to labour, inﬂuence these and other aspects of FDI in a number of ways. This brief chapter analyses the interrelationship between wages and FDI. STYLISED FACTS The propositions listed below may be stylised but not necessarily facts, in the sense that they are supported by robust empirical evidence. Nonetheless they provide an informative framework for discussing the relationship between wages and FDI. 1. 2. 3. FDI is attracted to low wage locations. Foreign ﬁrms pay relatively high wages; they create a labour aristocracy and increase income inequalities in host countries. Foreign ﬁrms pay high wages to skilled labour because of the skillintensive nature of their technologies and thereby promote income inequalities between skilled and unskilled labour in host countries. FDI reduces the wage gap between skilled and unskilled labour because foreign ﬁrms pay relatively high wages to unskilled labour. Foreign ﬁrms tend to disperse production across a number...
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