Capital/Labor Substitution, Capital Deepening, and FDI

Jürgen Antony

No 295, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

Abstract: Empirical studies show that the elasticity of substitution between capital and labor is larger than one in developed countries but smaller in developing countries. This paper develops a production function which allows for this structure in the elasticity of substitution. The case of a falling real interest rate and capital deepening in the developed countries in the presence of FDI flows from the developed to the developing country is analyzed. It is shown that this structure in the elasticity of substitution can be responsible for a U-shaped relationship between the capital intensity of the developed country and the relative capital intensity of the developing country. This carries over to an inverted U-shaped relationship between the capital intensity of the developed country and FDI profitability.

Keywords: Capital/Labor Substitution; FDI; Capital Deepening (search for similar items in EconPapers)
JEL-codes: E23 F21 O11 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Capital/Labor substitution, capital deepening, and FDI (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:aug:augsbe:0295

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