Rising wage inequality in the argentinean manufacturing sector: the impact of trade and foreign investment on technology and skill upgrading. Working paper

In the last 20 years, wage inequality has increased in many developing countries. Most research on this topic focuses on two possible causes: trade or skill-biased technical change. Several empirical studies document increases in skill intensity within all sectors, favoring the technological change explanation over trade. Instead, I present and test a model where trade and capital account liberalization increase the profitability of skill-biased new technologies in all sectors, but there is cross-firm heterogeneity in technology adoption due to differences in productivity, fixed costs of adoption and credit constraints. Liberalization drives the adoption of new technologies in developing countries by increasing market size, eliminating restrictions on technology transfers and reducing interest rates. Only the most productive firms enter export markets, and thus make enough profits to cover the fixed cost of technology adoption. Foreign-owned firms are less subject to credit constraints, and hence are also more likely to be able to finance investment in technology. The model predicts that the level of technology spending and skill intensity after liberalization is discretely higher for exporters and foreign-owned firms; and the change in technology spending and skill upgrading has an inverted U shape, being highest for firms in the middle range of the productivity distribution, such as new entrants in the export market. I test these theoretical predictions i