FOREIGN DIRECT INVESTMENT, SKILLS AND WAGE INEQUALITY IN EAST ASIA

Dirk te Velde · Oliver Morrissey

120 citations0/0 files storedJournal of the Asia Pacific Economy

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Labor market dynamics and wage inequality International Business and FDI Global trade and economics

Abstract

Foreign direct investment (FDI) can affect the levelanddispersion of wages, but there is a lack of empirical work in this area. This paper tests for the effects of FDI on wages and wage inequality in five East Asian countries. Wage inequality has been low and decreasing in some, but not all, East Asian countries. Using ILO data for wages and employment by occupation, we do not find strong evidence that FDI reduced wage inequality in five East Asian countries over the period 1985–98. Indeed, controlling for domestic influences (wage setting, supply of skills) we find that FDI has raised wage inequality in Thailand. Because we also find that FDI raises the wages for both skilled and low-skilled workers, our findings should help to move the debate from impact (does FDI contribute to growth and development?) to appropriate policies to utilize FDI (how can we make FDI work for all?). We suggest that the education system in Thailand has not been sufficiently oriented to maximize the benefits from FDI. Countries wanting to develop on the basis of FDI should invest sufficient resources in good quality and appropriate human resources, or otherwise face the possibility that growth coincides with rising wage inequality.

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References

1998How does foreign direct investment affect economic growth?1992Changes in Relative Wages, 1963-1987: Supply and Demand Factors 1995Getting Interventions Right: How South Korea and Taiwan Grew Rich 1997Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom 1995North-South Trade, Employment and Inequality 2001Competitiveness, Technology and Skills 2008The Global Governance of Trade As If Development Really Mattered 1995Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras

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