Abstract
This paper examines the differential effects, based on the size of the plant, of industry-level foreign direct investment (FDI) on plant-level employment and the wages of skilled and unskilled workers in India's manufacturing sector. On average, there are strong positive differential effects of increased inward-level FDI for large plants relative to small and average-sized plants in terms of employment and the average wages of both skilled and unskilled workers. Small plants experience negative effects from inward FDI, which can be explained by intra-industry reallocation of output from smaller to larger plants. After conducting a regional analysis, I find positive spillovers to small plants in Indian states that receive large and persistent flows of FDI. This suggests that a critical mass of FDI is necessary for small plants to experience positive spillover effects.
Highlights
Economic theory and policy has often stressed the important role of foreign direct investment (FDI) in transforming the productive capacities of an economy and contributing to the development of human capital
Putting the results from the employment and wage effects together, we find that large plants experience an expansion in employment of both skilled and unskilled workers relative to small plants as industry-level FDI increases, along with a relative increase in the total wage bill and average wages paid out to skilled and unskilled workers
I investigate the impact of industry-level FDI on plant-level employment and wages for both skilled and unskilled workers
Summary
Economic theory and policy has often stressed the important role of foreign direct investment (FDI) in transforming the productive capacities of an economy and contributing to the development of human capital. This paper focuses on the effects of industry-level FDI on plant-level employment and the wages of both skilled and unskilled workers in India’s manufacturing sector. Foreign ownership provides host economies with access to knowledge, which, if absorbed by domestic workers, enhances the domestic human capital stock, making it permanently more productive. This impact spills over to domestic firms through the training of suppliers, imitation, and labor mobility, while workers migrate from multinational firms to domestic firms and transfer their know-how to domestic workers through various channels of formal and informal interaction (Aitken and Harrison 1999, Poole 2013). We would see greater poaching of skilled workers from domestic firms by foreign firms as opposed to an increase in the supply of skilled workers
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