Multinational Enterprises and Wage Costs: Vertical FDI Revisited

This study explores how wage costs for high-skilled and less-skilled labor in host countries affect the level of affiliate activities conducted by foreign MNEs. We find support for vertical FDI, in the sense that more FDI is conducted in countries where less-skilled labor is relatively cheap. In addition, we find that skilled-wage cost premia also affect FDI activities previously associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of relative wage costs on MNE activities are large. Rough calculations suggest that more than 20 percent of US affiliate sales in 1998 can be attributed to skilled-wage cost premia.