FDI, Technological Progress and Inequality

How does foreign direct investment impact wages and the task content of jobs? Using linked employer-employee data from Hungary and an event study approach the study presented in this ZEW Research Seminar shows that FDI increases the returns to abstract tasks, while it does not affect the returns to routine and face-to-face tasks. Consequently, wages in the top quintile increase three times more than those at the bottom of the wage distribution. This finding appears to be driven by skill-biased changes in technology, as acquired firms innovate more with their foreign partners, import more machines and improve product quality. These suggest that FDI-induced technological change is an important driver of growing inequality in developing countries.