This paper explores the possibility that unregulated FDI flows are causally implicated in the decline in labor productivity growth in semi-industrialized economies. These effects are hypothesized to operate through the negative impact of firm mobility on worker bargaining power and thus affecting wages. Downward pressure on wages can reduce the pressure on firms to raise productivity in defense of profits, contributing to a low wage-low productivity trap. The paper presents empirical evidence based on panel data fixed effects and GMM estimation for 37 semi-industrialized economies, which supports the causal link between increased firm mobility and lower wages, as well as slower productivity growth over the period 1970-2000.

December 03, 2005.