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Financial Globalization and the Labor Share in Developing Countries: The Type of Capital Matters

Katharina van Treeck and Konstantin Wacker
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Katharina van Treeck: Georg-August University Göttingen

No 219, Courant Research Centre: Poverty, Equity and Growth - Discussion Papers from Courant Research Centre PEG

Abstract: In this paper, we investigate how de facto financial globalization has influenced the labor share in developing countries. Our main argument is the need to distinguish between different types of capital in this context, as different forms of foreign investment have different fixed costs and impacts on the host countries' production process and vary concerning their bargaining power vis-à-vis labor. Assuming an aggregate elasticity of substitution between capital and labor would thus be misleading. Our econometric analysis of the impact of foreign direct vs. portfolio investment in a sample of about 40 developing and transition countries after 1992 supports this claim. Using different panel data techniques to address potential endogeneity problems, we find that FDI has a positive effect on the labor share in developing countries, while the impact of portfolio investment is significantly smaller, and potentially negative. Our results also highlight that de facto foreign investment cannot explain the decline of the labor share in developing countries over the investigated period.

Keywords: Labor Share; Globalization; Income Distribution; International Capital Flows; FDI; Wage Bargaining (search for similar items in EconPapers)
JEL-codes: C23 E25 F21 O15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-mac
Date: 2017-01-12
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