The impact of foreign direct investment and trade policy on productivity, wages and technology adoption in Mexican manufacturing plants /

by 1976- Kosteas, Billy D.

This dissertation consists of three essays investigating the impact of inward Foreign Direct Investment (FDI) in a developing country. Using panel data for Mexican manufacturing plants, I investigate how FDI affects domestic plants’ productivity; ask whether there is a link between productivity and wages; and estimate how trade policy affects investment and productivity at the plant level. The second paper tests whether the wage premium associated with foreign ownership is due to foreign firms’ attempts to prevent worker turnover and associated technology leakage, or simply due to sorting of higher ability workers into foreign-owned plants. This paper provides a framework for testing the worker-stealing hypothesis by exploiting the different predictions worker-stealing and worker-heterogeneity yield regarding the relationship between productivity and wages, and productivity and employment. I find evidence supporting the worker-stealing hypothesis. Tests between the worker-stealing and worker-heterogeneity models support the former. However, this behavior is not limited to foreign-owned plants, and only explains a small fraction of the average wage difference between foreign and domestic plants. The first paper estimates the effects of FDI on the plant’s productivity (the ownplant effect) and on other plants’ productivity (spillover effects). Using plant and industry price-cost markups to control for differences in market power and sorting of ii foreign plants across industries respectively, I find that foreign ownership is positively correlated with plant productivity. Productivity spillovers come only from FDI originating in North America. Furthermore, productivity is inversely related to the subcontracting share of revenue, reflecting the fact that maquiladoras (assembly plants which export most of their production back to the United States) have a significantly lower value-added compared with other plants. Foreign-owned plants also have higher markups indicating they possess greater market power. However, higher industry shares of foreign ownership lead to lower plant price-cost markups, supporting the hypothesis that foreign entry increases competition. The third paper investigates how trade protection affects investment and productivity. I find that tariffs decrease the probability a plant will invest in new capital or facilities, which in turn are correlated with increased productivity. Furthermore, these results are strongest for the smallest plants in an industry. iii