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

Abstract: This paper addresses the e¤ects of FDI on the labor share of income in developing countries. Our theory relies on the impacts of FDI on productive heterogeneity between \u85rms in a frictional labor market. FDI has two opposite e¤ects 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 rms. We test this theory on aggregate panel data through \u85xed e¤ects and system-GMM estimations. We \u85nd a quantitatively meaningful U-shaped relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. However, most countries are stuck in the decreasing part of the curve, which we relate to multinationalslocation choices