Ruhr Economic Papers

Ruhr Economic Papers #298

Labor Heterogeneity and the Risk of Expropriation in Less Developed Countries

by Philipp an de Meulen

RWI, 12/2011, 43 S./p., 8 Euro, ISBN 978-3-86788-343-6

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Abstract

Following the notion of skill-biased FDI flows from developed to less developed regions, high-skilled workers are likely to benefit from FDI to a larger extent. They earn a productivity advantage that potentially transfers into a skilled wage premium. This gives rise to distributional conflict that might turn into heterogeneous attitudes toward FDI inflows in line with skill. In this paper I study the effect of less developed countries’ skill compositions on the risk of expropriation. Not surprisingly, it turns out that the risk of expropriation decreases with a larger employment share of high-skilled workers. However, in a theoretical model, the effect is diminishing and even turns negative in the empirical investigation: if the relative supply of high-skilled labor is too large, the skilled wage premium turns negative despite the skill-bias of FDI. Then, high-skilled workers’ positive attitudes toward FDI vanish.

JEL-Classification: F21, D78, J24

Keywords: International investment; political economy; labor productivity

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