P20: FDI, firms and local development

PIs: Kis-Katos (leading)

Globalization affects regional development in low income countries through a wide range of channels, two of which, FDI and international trade, are expected to play an important role for the development of local economic activities. The proposed project focuses on the effects of FDI on regional development using a local labor market approach and investigating its interactions with trade policies.

From a theoretical perspective, FDI can be considered both as a substitute or as a complement for domestic investment in firms, creating ambiguous expectations about its effects on the domestic income distribution. Despite this basic ambiguity, in the developing country context its effects on average wages are expected to be positive, since the transfer of new technologies to the host country’s firms increases productivity of the directly affected firms as well as their domestic suppliers. Through potential local multiplier effects, this can also beneficially affect local demand and labor market outcomes.

We focus on the effects of FDI on local economic development. This can be achieved by connecting two strands of empirical literature, combining the firmbased approach used to investigate the effects of FDI on firms’ productivity and wages in developing countries with the local labor market based approach used to analyze the effects of trade policy reforms on regional poverty and wages.

Possible dissertation topics:

  • How does foreign direct investment affect local labor markets, poverty and other household outcomes in developing countries (in India, Indonesia, or Brazil)?
  • How is FDI reshaping upstream/downstream relationships of firms operating within the same regions? Do the local labor market effects of FDI depend on these relationships?
  • How do FDI (de-)regulation, trade liberalization and further policies (e.g. infrastructure policies) interact in shaping firm and local labor market outcomes in developing countries?