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Foreign Direct Investment, Capital Formation and Labour Costs: Theory and Evidence for Germany

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  • Hatzius , Jan

    (London School of Economics)

Abstract

This paper shows that the liberalisation of foreign direct investment (FDI) tends to make the effect of labour costs on domestic investment and labour demand more negative. Using data from Germany, it then provides evidence that is consistent with this view. First, high unit labour costs increase FDI outflows and lower FDI inflows. Second, the effect of unit labour costs on domestic 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 implied effect on long-run labour demand is substantial.

Suggested Citation

  • Hatzius , Jan, 1996. "Foreign Direct Investment, Capital Formation and Labour Costs: Theory and Evidence for Germany," Working Paper Series 468, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:0468
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    References listed on IDEAS

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    More about this item

    Keywords

    INVESTMENTS; LABOUR MARKET;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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