Abstract
We develop a three-country heterogeneous-firm model and show that FDI liberalization in one foreign country (F1) results in the following: (i) some firms from the home country switch from export to FDI in F1; (ii) skilled labor¡¯s wage rate drops in the home country; (iii) wage inequality between the skilled and unskilled labor decreases; and (iv) some firms from the home country switch from FDI to export to another foreign country (F2). The effects from trade liberalization are just the opposite, but the effects from education improvement are qualitatively the same as FDI liberalization. The cross-country externalities work through the domestic labor market.
Original language | English |
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Pages (from-to) | 19-49 |
Number of pages | 31 |
Journal | Frontiers of Economics in China |
Volume | 8 |
Issue number | 1 |
Early online date | 5 Mar 2013 |
DOIs | |
Publication status | Published - 2013 |
Externally published | Yes |
Funding
We greatly benefitted from our discussions with Pol Antras, Elhanan Helpman, Marc Melitz, and Stephen Yeaple, and presentations in Tsinghua University, the ADI workshop on Globalization and Emerging Markets (University of Copenhagen), the 2011 AsiaPacific Trade Seminars, and the Hokkaido & Kyoto Universities Joint International Conference on International Economics & Economic Theory (2012). We would also like to thank Prof. Zhiqi Chen for valuable comments and suggestions. Qing Liu thanks the financial support of UIBE Research Project Funding (No. 11QNJJX01).