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Paper presented at the Conference “New economic concepts in the current European crises“.

Working Paper, GIGA (German Institut of Global and Area Studies, Leibniz-Instiut für Globale und Regionale Studien)

Abstract: This paper explores the influence of international capital movements – in form of FDI and portfolio investment – on the labor share of developing countries. Within a political economic framework, it is argued that bargaining power is an important factor influencing the distribution of gains from financial globalisation. The worldwide loosening of capital controls may raise the demand for labor in developing countries but can also weaken the bargaining powers of worker vis-à-vis investors who now can easily relocate their capital abroad. The bargaining relationship is shaped by the fixed costs of reallocation which constitute the investor’s outside options. Since reallocation of production and management entails more costs than reallocation of liquid financial assets, foreign portfolio investors are more mobile and can hence exercise more bargaining power than foreign direct investors. The effect is enhanced by the dependence of developing countries on foreign investments, the existence of surplus labor as well as the lack of a comprehensive social safety net.
A panel data analysis covering above forty countries from 1992 to 2009 supports this hypothesis: An increase of FDI stock (in relation to GDP) by 1 percentage point is associated with an increase of labor share by about 0.2 to 0.6 percent. The effects are robust when applying different models (static and dynamic) and various estimation techniques (least squares dummy variable). As the availability on national account data is rather poor in these economies, another contribution of this paper is the preparation of a data set on the labor share.