1 FDI, Outsourcing and Wage Inequality: A North-South Model of Skill Accumulation

This study develops a North-South model with skill accumulation to investigate the effects of international specialization on innovation, skill accumulation, wage inequality and the pattern of production. Southerners can choose to become skilled or unskilled and skill formation depends on private and public educational investments and skill externality. We find that if the skill formation elasticity of public educational investments is sufficiently high, increasing incentives of outsourcing will raise the extent of outsourcing, the adjusted R&D difficulty and international wage inequality for the skilled while the extent of FDI and relative wage rate in the South will be lower. Increasing incentives for FDI will raise the extent of FDI and relative wage rate in the South and reduce the extent of outsourcing, adjusted R&D difficulty and the international wage inequality for the skilled