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FDI CONSEQUENCES OF DOWNWARD WAGE–COST RIGIDITIES

Jeongseok Song (), Daecheon Yang and Soonwon Kwon ()
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Jeongseok Song: School of Economics, Chung-Ang University, 84, Heukseok-ro, Dongjak-gu, Seoul Korea
Daecheon Yang: School of Business Administration, Chung-Ang University, 84, Heukseok-ro, Dongjak-gu, Seoul Korea
Soonwon Kwon: Division of Business Administration, Sookmyung University, Cheongpa-ro 47-gil 100, Yongsan-gu, Seoul Korea

The Singapore Economic Review (SER), 2017, vol. 62, issue 05, 1223-1244

Abstract: This paper estimates an adjusted gravity model by directly measuring downward wage rigidities based on our modified regime-switching specification in order to investigate the effect of labor market flexibility on the flows of foreign direct investment (FDI) between Korea and 18 counterpart countries. To measure wage–cost rigidities, we employ firm-specific sales data for 410,012 firms in 19 countries obtained from Compustat as a relevant driver of wage costs extracted from earnings data by International Labor Organization (ILO). Our results suggest that greater wage rigidities in a counterpart country are associated with less net-outflows of FDI in Korea.

Keywords: Foreign direct investment; wage rigidities; labor market flexibility; regime-switching (search for similar items in EconPapers)
Date: 2017
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