Foreign direct investment and wage inequality: Is skill upgrading the culprit?

Akinori Tomohara*, Kazuhiko Yokota

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)


This article examines whether inward Foreign Direct Investment (FDI) is a source of wage inequality between skilled and unskilled labour in developing countries. Although the literature has explored wage inequality issues, we studied the impacts of FDI on skill upgrading comprehensively, together with trade and other factors (such as FDI externalities). Specifically, our analysis introduces the origin of FDI, controls for plant heterogeneity and relates the results to the FDI theory on Multinational Enterprises (MNEs). The results show that, on average, FDI caused wage inequality because of FDI-led skill-biased technological change. However, Japanese and Taiwanese investments helped to alleviate the inequality. Japanese and Taiwanese FDI is motivated by cost advantages achieved through vertical FDI and thus increases relative demand for unskilled labour.

Original languageEnglish
Pages (from-to)773-781
Number of pages9
JournalApplied Economics Letters
Issue number8
Publication statusPublished - 2011

ASJC Scopus subject areas

  • Economics and Econometrics


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