Proceedings of the German Development Economics Conference, Berlin 2011 54
We address the effects of FDI on the labor share in developing countries. Our theory relies on the impacts of FDI on productive heterogeneity in a frictional labor market. FDI have two opposite effects: 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 system-GMM estimations. We find a U-shaped relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. Most countries are stuck in the decreasing part of the curve.