Working Paper: NBER ID: w10603
Authors: James R. Markusen; Thomas F. Rutherford
Abstract: Gains from productivity and knowledge transmission arising from the presence of foreign firms has received a good deal of empirical attention, but micro-foundations for this mechanism are weak . Here we focus on production by foreign experts who may train domestic unskilled workers who work with them. Gains from training can in turn be decomposed into two types: (a) obtaining knowledge and skills at a lower cost than if they are self-taught at home, (b) producing domestic skilled workers earlier in time than if they the domestic economy had to rediscover the relevant knowledge through reinventing the wheel'. We develop a three-period model in which the economy initially has no skilled workers. Workers can withdraw from the labor force for two periods of self study and then produce as skilled workers in the third period. Alternatively, foreign experts can be hired in period 1 and domestic unskilled labor working with the experts become skilled in the second period. We analyze how production, training, and welfare depend on two important parameters: the cost of foreign experts and the learning (or absorptive') capacity of the domestic economy.
Keywords: gains from trade; imported expertise; foreign firms; domestic workers; productivity
JEL Codes: F2; F23; O1; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in the cost of foreign experts (F29) | Increase in the number of skilled workers produced earlier (J24) |
| Decrease in the cost of foreign experts (F29) | Earlier consumption of goods produced using skilled labor (N63) |
| Utilization of foreign experts (F35) | Domestic workers trained in one period instead of two (J24) |
| Foreign experts and domestic skilled workers are complements in the training process (J24) | Until the cost of foreign expertise becomes very low, at which point they become substitutes (F16) |