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Foreign Direct Investment, Skills and Wage Inequality in East Asia

Working paper

Written by Dirk Willem te Velde

Working paper

Foreign Direct Investment can affect the level and dispersion of wages, but there is a lack of empirical work in this area. This paper tests for the effects of FDI on wages and wage inequality in five East Asian countries. Wage inequality has been low and decreasing in some but not all East Asian countries. Using ILO data for wages and employment by occupation, we do not find strong evidence that FDI reduced wage inequality in five East Asian countries over the period 1985-1998. Instead, controlling for domestic influences (wage setting, supply of skills) we find that FDI has raised wage inequality in Thailand. Because we also find that FDI raises the wages for both skilled and low-skilled workers, our findings should help to move debate from impact (does FDI work for development) to appropriate policies to use FDI (how can we make FDI work for all). We suggested that the education system in Thailand was not sufficiently prepared to absorb the effects of FDI. Countries wanting to develop on the basis of FDI should invest sufficient resources in good quality and appropriate human resources, or otherwise face the possibility that growth coincides with rising wage inequality.

Dirk Willem te Velde and Oliver Morrissey