Foreign direct investment (FDI), the movement of long-term capital, has been increasingly important in the world economy since the early 1970s. Its growth rate outpaces that of trade in goods and gross national product (GNP) during the same period. Prior literature mostly focuses on either the causes (determinants) of FDI or its relationships with trade and economic growth. This dissertation investigates the consequences of FDI, especially its empirical effects on wages in developing and developed countries. Moreover, the differential effects of FDI on various types of labor within developing countries are estimated. Using an extension of a specific-factors model, a revenue (GNP) function framework with FDI is derived. From a translog specification of GNP function, the share of labor compensation in GNP is derived as a function of output prices, factor endowments and FDI. Data from the United Nations and the World Bank, for 1975–1995, are used to estimate the labor share equations. Panel estimation procedures, complemented by specification tests and error structure analyses, are used since the data set includes 11 developing and 15 developed countries. Results suggest that inward FDI increases developing countries' wage rate, while outward FDI lowers the wage rate of developed countries. Thus, factor price equalization between developed and developing countries is observed as a result of FDI flows. Moreover, inward FDI raises skilled (non-agricultural) labor's wage, while lowering that of the unskilled (agricultural) labor. Thus, FDI is likely a source of income inequality within developing countries, although the overall wage rate increased due to FDI inflows.; The effects of FDI on wage inequality within China are estimated to provide a case study. Results are similar to that of the cross-country case. Overall wage rate in China has increased with more FDI inflows, but the coastal provinces have benefited more than the interior provinces.
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