Labor Training and Foreign Direct Investment

16 Pages Posted: 15 Jan 2014

See all articles by Qing Liu

Qing Liu

Renmin University of China

Larry D. Qiu

The University of Hong Kong - Faculty of Business and Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: February 2014

Abstract

Evidence shows that most foreign direct investment (FDI) flows from developed to developed countries (North–North) in skilled labor‐intensive industries. This paper builds a model that incorporates labor training into the proximity–concentration tradeoffs to analyze the entry mode of multinationals to a foreign country. Production requires both skilled labor and unskilled labor.. A multinational pursuing FDI needs to provide training to some workers in the host country to equip them with skills that are specific to the production of the firm. Labor training and skill specificity lead to contract friction. It is shown that in skilled labor‐intensive industries, FDI increases along with the economic development level of the host country, whereas in unskilled labor‐intensive industries, the reverse is true. This paper provides a theoretical explanation for the empirical findings on the prevalence of North–North FDI in skilled labor‐industries and North–South FDI in unskilled labor‐intensive industries.

Suggested Citation

Liu, Qing and Qiu, Larry Dongxiao, Labor Training and Foreign Direct Investment (February 2014). Review of International Economics, Vol. 22, Issue 1, pp. 151-166, 2014. Available at SSRN: https://ssrn.com/abstract=2379183 or http://dx.doi.org/10.1111/roie.12102

Qing Liu (Contact Author)

Renmin University of China ( email )

Larry Dongxiao Qiu

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

School of Economics and Finance
University of Hong Kong
Pokfulam
Hong Kong

HOME PAGE: http://www.bm.ust.hk/~larryqiu/

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