The Effects of Real Wages and Labor Productivity on Foreign Direct Investment

The volume of foreign direct investment (FDI) both into and out of the United States has grown rapidly in the past several decades. Theoretically, labor costs in both source and host countries could be important determinants of these flows. But thus far, no consistently significant effects have been reported for FDI flows between the U.S. and other industrialized countries. In this paper, I estimate equations for U.S. FDI flows to and from five other industrialized countries. The explanatory variables include both source and host country real wages and labor productivity. But to put my work in perspective, I shall first in section II discuss recent literature in the area. Then section III briefly discusses a theoretical model to highlight the possible effects of the labor variables. The empirical procedure and results are presented in section IV and a summary in section V.