The authors thank Yi Lu, Zhigang Tao, Stephen R. Yeaple, two referees and seminar and conference participants at the Canadian Economic Association Annual Conference (2010), the European Trade Study Group Annual Conference (2012), Peking University (CTIW), the Shanghai University of Finance and Economics, the University of Hong Kong, for comments and discussions. Liu thanks financial support from National Science Foundation of China (project no. 71302009).
Labor Training and Foreign Direct Investment
Article first published online: 13 JAN 2014
© 2014 John Wiley & Sons Ltd
Review of International Economics
Volume 22, Issue 1, pages 151–166, February 2014
How to Cite
Liu, Q. and Qiu, L. D. (2014), Labor Training and Foreign Direct Investment. Review of International Economics, 22: 151–166. doi: 10.1111/roie.12102
- Issue published online: 13 JAN 2014
- Article first published online: 13 JAN 2014
- National Science Foundation of China. Grant Number: 71302009
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.