FDI and the labour market: A review of the evidence and policy implications

This paper presents a series of results concerning the labour-market impact of inward foreign direct investment (FDI) in the UK. The paper demonstrate s that one of the crucial impacts of FDI is to increase wage inequality and the use of relatively more skilled labour in the domestic firms. This resu lt is found to be a combination of two effects. First, the entry by a multi national enterprise (MNE) increases the demand for skilled workers in an in dustry or region, thus increasing wage inequality. Second, technology spill overs occur from foreign to domestic firms. As a result of these spillovers , relative demand for skilled workers increases in the domestic firms, furt her contributing to aggregate wage inequality and skill upgrading. The pape r also considers how FDI impacts upon skill shares by productivity differen tials between foreign and domestic firms. Finally, the policy implications of this are discussed, from the perspective of regional development, and th e likely effectiveness of attracting FDI to reduce structural unemployment.