This paper examines the issue of the effect of foreign direct investment on
the relative wage in the context of a developing economy. Recognizing that
competing domestic entrepreneurs are potentially skilled workers, foreign
investment in skilled-labor intensive sectors is shown to lower the relativ
e wage. Moreover, a general lump sum subsidy to foreign and domestic firms
is shown to lower aggregate welfare, whereas a discriminatory subsidy only
to foreign firms may raise welfare. (C) 2002 Published by Elsevier Science
BN.