Low Bargaining Power of Labour Attracts FDI in India

Abstract

There have been a lot of studies on FDI and the determinants for its flow. It is normally argued that low capital-output ratio and high labour productivity are the two attractive reasons for the flow of foreign direct investment. It is also commonly held that high wage is a deterrent to the flow of FDI. In this paper, however, it is shown with the data available in Indian context, that the increasing trend in the absolute wage of the worker, contrary to common belief, does not deter the increasing flow of FDI. To explain this intriguing phenomenon the authors have considered in this paper the ratio of the wage to the value a worker adds. It is found with the available Indian data that this ratio is declining though the absolute wage is increasing. It is this decline in the ratio that correspondingly promises more return on the capital invested and therefore is held as an important reason for the flow of FDI, notwithstanding the increase in absolute labour wage. This ratio, in this paper is taken as a definition for the measure of the bargaining power of labour. The study undertaken in this paper implies that the bargaining power of the labour cannot be ignored as a determinant for the flow of FDI.