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2.0 Literature Review

Ramasamy and Yeung(2001) in the causality analysis of the FDI-wages-productivity nexus in China main purpose is to determined the relationship between three variables which is foreign direct investment(FDI), wages and productivity. The authors also emphasizes on the direction of the relationship of the variables in six different directions. Author uses vector autoregressive regression (VAR) model and two-step generalized method of moments (GMM)-type estimation approach to test the relationships through developing a system of equations. Besides that, FDI display a positive effect on productivity of coastal provinces and not inland and it does not act as a significant determinant of FDI.

According to Velde and Morrissey (2002), skilled labor wages and demands have increased over the time because of increasing demand of foreign firms. Skilled workers have a better opportunity in getting higher wages due to the demand by domestic and foreign firms in order to boost up their productivity. Most of the worker which obtain training and education provided by foreign company will tends to demand higher wage after they are equip with skill although they have changed their workplace to other company regardless of foreign or domestic company.

According to Liu(2004), his research emphasize in explaining how externalities are generates through foreign direct investment (FDI) due to technology transfer. The author studies the level and rate effects of spillovers on the productivity in positive and negative direction on domestic firm. As stated in neoclassical growth theory, due to diminishing marginal returns to capital, economic growth based on capital accumulation cant sustained. Therefore, for FDI to promote long-term economic growth, it must lead the recipient country to adopt policies that are conducive to economic growth (such as encouraging human capital investments) or policies that facilitate technology transfer. The author also studies whether productivity level of a firm is affects with the presents of FDI and also on the rate of productivity growth of domestic firms.

Juraj Stancˇı´k(2008) studies on the foreign direct investment(FDI) spillover effects in two direction which is horizontal and vertical spillover effect on the sales growth of domestic companies in Czech Republic of 10 years period from 1995–2005. Two kinds of foreign investment spillovers which is focus by the author is acquisitions and greenfields. From the results obtain by the author, neither acquisition or greenfields, both types of foreign investors tend to import their supplies from abroad instead of using domestic suppliers which causes local company or supplier to loses their sales and competiveness. There is much smaller effects in horizontal spillover effects where the impact of greenfields remains negative, while the impact of takeovers on domestic companies within the same sector is now positive. No forward spillover effects are present. The author also studies the effects within the same sector and through vertical linkages. The author findings are still unable to determined whether greenfield or acquisition bring more benefits to the nation.

Vijaya and Kaltani(2007) research mainly on the impact of Foreign Direct Investment(FDI ) the wages of manufacturing sector. It found that FDI-flows have a negative impact on average manufacturing wages especially on female manufacturing wages. This phenomenon is due to the bargaining process between labor and capital with foreign firms. The author urged that the decline in labor supply also causes greater impact on the more vulnerable workers female workers because their bargaining advantages on wages normally is lower than male worker. Besides that, knowledge or technology transfer are often use by foreign firms to offer low wages to their employees. It show that domestic firm also tends to cut cost in order to remains on competitive position with foreign firm due to the change in employee bargaining power which causes spillover to the wage setting process.

Lipsey and Sjoholm(2004) studies on the effect on the effect of foreign direct investment in Indonesian manufacturing on wages of domestic manufacturing firms. The author’s findings showed the present of spillover effect on wages of both white collar and blue collar worker. However the wages spillover effect is greater on white collar worker compared to blue collar worker. The author carried out a cross section of Indonesian manufacturing industries and provinces in one of the few years for which data on worker characteristics were available. the data are provided by Biro Pusat Statistik on manufacturing sector and carried out econometric estimations. Wages in locally owned plants were high in industries and industries within provinces with large foreign presence. Since the foreign plants also pay higher wages than locally owned ones, the two factors together imply that higher foreign presence raises the general wage level in a province and industry.

According to Hoi(2007) studies on foreign direct investment and wages spillover which includes vertical wage externalities (inter-industry) other than horizontal (intra-industry) wage spillovers where only able in explaining the mixed results but failed to display significant wage spillover effects on domestic firms. Therefore, the author includes vertical wage externalities in his studies in order to clarify the relative strength channels through which wage spillovers occur. In the author finding, it found that training activities which carried out by firms which clarify that vertical wage spillovers do exist sometimes depending on characteristic of the domestic firms. The similiarity between foreign firms and domestic firms can explained the cause and effect between FDI and wage spillover. The author focuses mainly on the differences in ownership structure, technology level and scale economies of the firms.

Based on Wang and Wong(2007) studies, they branch out foreign direct investment (FDI ) into greenfields and cross-border mergers or acquisitions to studies on the impact of FDI on economic growth. However, this is a country level study and greenfield FDI is only estimated from total FDI inflow values. Insufficiency in data is one of the reason for incomplete of studies which induces distinguishing between acquisitions and greenfields.

Most domestic companies are suffering in the presence of foreign companies due to the competition of both in obtaining skilled labor and in terms of wages offering.

This paper examine on the effect of foreign direct investment on the urban wage in China. According to Ying(2005), there are positive linkage between foreign presence and urban real wages. This can be seen as most of the FDI inflows are from multinational company (MNE) which often offer higher wages to skilled labor which will greatly affect the trend of wages level. It causes domestic firm to offer higher wages in order to attained skilled labor. With higher pay offer to labor, people tends to equip them with knowledge on advance technology as most MNE uses advance technology in production in order to boost up the production level. The direction of causality between FDI and host country wages whether through greenfield investment nor acquisition or merger has also been shown in the studies. According to Ying(2005), there are significant spillover in knowledge too. MNE often provide new knowledge on technology in order to raise productivity. Because both local and foreign firms tend to compared in obtaining skilled worker, higher wages are offered. This causes some labor which obtained knowledge from foreign firm tend to work in local firm due to higher wages. Therefore, the knowledge spillover is said to be positive too.

The direction of the causality linkage between FDI and host country wages is not unambiguous(Ying 2005), as an example, the strategy of MNE to invest in a particular place is affected by its wages level. A country with high wage level will definitely be drop out. Therefore, MNE tend to starts their investment in developing country compared to developed country. Government policies are also one of the main attractions on FDI inflows. A country with lots of obstacle and political red tape tend to attract less FDI. According to Ying(2005), The Chinese government has adopted a policy to promote FDI for accelerating industrialization and economic growth. Starting from the ‘open-door policy’ in the early 1980s, make China successfully received lots of FDI till today.

In the studies of Ang(2007) on determinant of foreign direct investment in Malaysia, it show that higher macroeconomic uncertainty tends to encourage the inflows of FDI which is different from the conventional studies. The author suggest that the larger the size of the domestic market will attracts more inflows of FDI. This is because foreign firms will enjoy the benefits on economies of scale. Other than that, investors are attracted to higher GDP growth rate of Malaysia economy(Ang ,2007). This is to ensure the company is in a good condition of economy where it will guarantee a promising return to investor. Another determinant is that trade openness of a nation may lead to FDI inflows, conforming to the theoretical arguments (Ang 2007).With the present of trade openness, foreign firms or investors has more freedom on economy activity which will lead more investment inflow. Besides that, diminishing currency rate also tends to attracts more FDI inflows (Ang2007).The lower a currency is of a country, it will increased the wealth position of the foreign firms, it enable the investor to invest more on domestic currency.

FDI inflows react negatively to an increase in corporate tax rate(Ang2007). Foreign investors tend to deviate of from investing if the tax is too high. Malaysia government tends to offer various tax-incentives to foreign firm in order to attract FDI inflows. An appreciation in currency tends to divert the inflow of FDI(Ang2007). This is because it will stringent the capital to invest on domestic currency.

In studies of vertical and horizontal spillover on foreign direct investment, there are evidence related on positive spillovers working both within industries and between industries, and evidence of vertical effects being more important than horizontal effects(Wang and Zhao,2008). Vertical spillover is greater than horizontal effects because there are differences in ownership advantage. Ownership advantages cause different forms of FDI and so on spillovers. Another issue which arises is that whether different types of foreign investors are more prone is causing certain type of spillovers compare to others. Schroath et al. (1992) argue that MNEs in certain industries of a particular country possess specific advantage that accrued to them because of the way their industries developed in their home country.

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