Labor training and foreign direct investment

Qing LIU, Larry D. QIU

Research output: Journal PublicationsJournal Article (refereed)

Abstract

Evidence shows that most foreign direct investment (FDI) flows from developed to developed countries (North–North) in skilled labor‐intensive industries. This paper builds a model that incorporates labor training into the proximity–concentration tradeoffs to analyze the entry mode of multinationals to a foreign country. Production requires both skilled labor and unskilled labor.. A multinational pursuing FDI needs to provide training to some workers in the host country to equip them with skills that are specific to the production of the firm. Labor training and skill specificity lead to contract friction. It is shown that in skilled labor‐intensive industries, FDI increases along with the economic development level of the host country, whereas in unskilled labor‐intensive industries, the reverse is true. This paper provides a theoretical explanation for the empirical findings on the prevalence of North–North FDI in skilled labor‐industries and North–South FDI in unskilled labor‐intensive industries.
Original languageEnglish
Pages (from-to)151-166
Number of pages16
JournalReview of International Economics
Volume22
Issue number1
Early online date13 Jan 2014
DOIs
Publication statusPublished - Feb 2014
Externally publishedYes

Bibliographical note

The authors thank Yi Lu, Zhigang Tao, Stephen R. Yeaple, two referees and seminar and conference participants at the Canadian Economic Association Annual Conference (2010), the European Trade Study Group Annual Conference (2012), Peking University (CTIW), the Shanghai University of Finance and Economics, the University of Hong Kong, for comments and discussions. Liu thanks financial support from National Science Foundation of China (project no. 71302009).

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