The Impact of Outward FDI on the South Korean Labor Market: Evidence on the Wages of Four Types of Workers

Abstract

(ProQuest: ... denotes formulae omitted.)I. IntroductionRecently, globalization has been rapidly progressing with the help of such factors as reduction in transportation costs, development of IT technology, and lowered trade barriers, which consequently have accelerated the OFDI (Outward Foreign Direct Investment) of multinational corporations to optimize their productivity. The scale of OFDI around the world soared to 1.4 trillion U.S. dollars in 2012 from 21.4 billion U.S. dollars in the 1990s (UNCTAD, 2012). The dramatic increase in OFDI becomes a direct cause of as it accelerates relocation of production activities overseas (Kang and Lee, 2011).It has started to become more convincing that OFDI and the diminished domestic production activities caused by deindustrialization could create negative impacts on the labor market in terms of employment and wages. In particular, a concern was raised that relocation of production sites could reinforce wage inequality, victimizing specific laborers. For instance, Slaughter (2000) points out that affiliate activities of multinationals may substitute unskilled-labor- intensive production, giving rise to the relative demand-shift from skilled to unskilled workers.The purpose of this paper is to find empirical evidence that OFDI tends to accelerate wage inequality. However, this paper addresses the possibility that the effect of OFDI can be heterogeneous depending on the types of workers. Using individual panel data published by Korean Labor Institute (KLI), we classify the workers into four categories depending on skill-intensity and job-permanency. Moreover, we examine the effect of OFDI based on investment destination: OFDI to OECD and non-OECD countries. The empirical results indicate that permanent workers obtain more wage-benefit than temporary ones by OFDI regardless of skill-intensity. In addition, when OFDI is divided into OECD and non-OECD, it turns out that their impacts are quite different.In fact, the wage inequality triggered by reallocation of production is not a surprising issue, and there have been active discussions. According to Feenstra and Hanson (1996a), one of the most representative studies regarding the issue, 15-33 % of wage inequality observed in the manufacturing industry in the U.S. from 1979 to 1990 can be explained by global outsourcing. Other analogous studies conducted on the effects of global outsourcing or OFDI on increasing wage inequality also drew similar conclusions (Anderton and Breton, 1999; Head and Ries, 2002; Hijzen et al., 2005; Hsieh and Woo, 2005; Ahn et al., 2008; Becker et al., 2008; Driffield et al., 2009; Ebenstein et al., 2012). On the other hand, Slaughter (2000) concludes that relocation of multinational corporations' production activities does not necessarily increase relative demand for skilled labor. There are also a significant number of researches that estimate that OFDI has little effect on relative demand for skilled labor or at the least, has even positive influences. (Lipsey, 2000; Lipsey, Ramstetter, and Blomstrom, 2000b; Becker et al., 2008; Masso et al., 2008).Without considering the fact that the effect of OFDI on employment or wages can vary by individual level, however, those studies simply focus on the overall size of wage inequality. Facing the matter, Geishecker and Gorg (2008) analyzed the effect of outsourcing on individual wages through utilization of individual panel data and discovered that the effect of outsourcing on wages can be heterogeneous according to individual skill-intensity. Geishecker and Gorg (2008) categorized workers into three different groups according to skill-intensity and demonstrated an empirical analysis result that the wages of the group with the lowest skill-intensity increased by 1.8% whereas the highest skill-intensity group benefited with a 3.3% increase.Meanwhile, another perspective that the effect of outsourcing on wages can vary according to contract types (which also used individual panel data as Geishecker and Gorg (2008) did) started to gain attention. …