FDI and the relative wage in a North South global economy

This paper examines the effect on relative wages when FDI occurs from the North to the South. The Northern firms undertake FDI to take advantage of the lower wage of unskilled labor in the South. The key assumption is that FDI from North to South occurs in an unskilled labor intensive production activity, but that activity is located in a sector that is relatively skill-intensive. It is shown that FDI leads to an increase in the relative wage of skilled labor in both North and South. It is also found that FDI may increase unemployment of unskilled labor in the South.