Foreign direct investment and its impact on real wages: evidence from Turkish micro-level data

Abstract

This paper analyzes the role of foreign direct investment (FDI) on wages, using Turkish firm-level data from 2003 to 2010, a period which coincides with significant FDI inflows both in manufacturing and service sector firms in the region. We explore the possibility of increased foreign presence translating into shifts in either labor demand or supply curves thereby resulting in changing the total wage bill or wage per worker in the host country. To empirically test this relationship we employ a dynamic specification of the wage equation. After addressing endogeneity concerns, the results reveal that foreign presence measured in terms of intra- and inter-sectoral linkages is related to higher wage bills in the host economy, hence strengthening the argument for attracting greater foreign investment to enhance labor welfare.