A Model of Industrialization and International Wage Convergence Based on Multi-Plant Foreign Direct Investment
Abstract
We show that for industrialization and international wage convergence through multi-plant foreign direct investment (FDI) to occur, the measure of the quality of the social infrastructure in the South relative to that in the North must be at least as large as the South-North wage ratio. We also show that if profitable FDI flows already take place from the North to the most productive economy in the South, then less productive Southern economies can also become recipients of FDI, provided that they are integrated into the world trading system, and there are no impediments to the decline of their wage levels. An increase in the size of public debt in the North decreases the amount of FDI outflow. Incorporating human capital accumulation decisions, we show that FDI flows to the South result in increased skill premiums in the North but they also lead to a period of higher global growth rate as well as a narrower North-South unskilled wage gap.