FDI and the labor share in developing countries: A theory and
some evidence

Bruno Decreuse (1) , Paul Maarek (1)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

This paper addresses the impact of FDI on the factor distribution of income in developing countries. We propose a theory that relies on the impacts of FDI on productive heterogeneity between firms in a frictional labor market. We argue that FDI have two opposite effects on the labor share: a negative force originated by market power and technological advance, and a positive force due to increased labor market competition between firms. Then, we test this theory on aggregate panel data through fixed effects and system-GMM estimations. We find a quantitatively meaningful U-shaped relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. However, most of the countries are stuck in the decreasing part of the curve,
which we relate to multinationals' location choices.

Mots clés: FDI; Matching frictions; Firm heterogeneity; Technological advance

Mots clés: IDE; Frictions d'appariement; Hétérogénéité des firmes; Avance technologique

Domaines: Economies et finances

Bruno Decreuse, Paul Maarek. FDI and the labor share in developing countries: A theory and
some evidence. 2008. ⟨halshs-00333704⟩