Foreign direct investment and factor demand elasticities

This paper argues that the liberalisation of foreign direct investment (FDI ) has made labour costs more important to domestic investment and long-run labour demand. It provides evidence from British and German data that is co nsistent with this view. First, high unit labour costs increase FDI outflow s and lower FDI inflows. Second, the effect of unit labour costs on domesti c 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 estimates suggest that the long-run labour demand elasticity may have risen substantially. (C) 2000 Elsevier Science B.V. All rights reserved.