Foreign direct investment and the relative wage in a developing economy

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 relative 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.