Foreign Direct Investment, Productivity, Demand for Skilled Labour and Wage Inequality: An Analysis of Uruguay


  • I am indebted to Gaston Carracelas and Dayna Zaclicever for their help with the database. I gratefully acknowledge helpful comments and suggestions from two anonymous referees, Andres Rius and Henry Willebald. Also, I wish to thank to the participants at the Eleventh European Economic and Finance Society Conference, the Fourteenth European Trade Study Group Meeting and at the Jornadas de Economia at the Facultad de Ciencias Económicas y Administración. The usual disclaimer applies.


This study seeks to identify the causal effects of foreign ownership on productivity, the demand for skilled labour and wage inequality. With this aim, we use differences-in-differences techniques for a panel of Uruguayan manufacturing firms in the period 1997–2005. Our results seem to indicate that FDI causes higher productivity and increased demand for skilled labour. Furthermore, although average wages are higher in foreign-owned firms than in domestic ones, the wage gap between skilled and unskilled workers is wider. It follows that promoting foreign investment enhances productivity. In addition, due to the greater demand for skilled workers, policies such as training schemes would be conducive to raising productivity still further, while other social policies could help to mitigate the wage inequality effects.