Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 468: Foreign Direct Investment, Capital Formation and Labour Costs: Theory and Evidence for Germany

Jan Hatzius
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Jan Hatzius: London School of Economics

Abstract: This paper shows that the liberalisation of foreign direct investment (FDI) tends to make the effect of labour costs on domestic investment and labour demand more negative. Using data from Germany, it then provides evidence that is consistent with this view. First, high unit labour costs increase FDI outflows and lower FDI inflows. Second, the effect of unit labour costs on domestic manufacturing investment was more negative in the high-FDI 1980s than in the low-FDI 1970s, and this change was concentrated in high-FDI industries. The implied effect on long-run labour demand is substantial.


JEL-codes: F33; J21; O16

31 pages, September 1996

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