Working Paper: NBER ID: w2615
Authors: Irving B. Kravis; Robert E. Lipsey
Abstract: Direct investment in foreign countries by U.S. goods industries represents a response to differences in labor costs to a much greater extent than the more rapidly growing investment by service industries. The latter seem to be less able to allocate different types of production to different areas of the world, probably because services are less tradable than goods; they must more often be produced where they are consumed or consumed where they are produced. Therefore, while direct Investment abroad in goods industries represents an allocation of production that Increases the demand for high-skill labor and for R & D input in the U.S. and decreases the demand for low-skill labor, direct investment in service industries, while it increases a firm's share of foreign markets, is likely to have little effect on the firm's demand for labor in the U.S. or on the composition of its labor force.
Keywords: multinational firms; service industries; trade; direct investment
JEL Codes: F23; L80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| direct investment abroad by goods industries (F23) | increase demand for high-skill labor in the U.S. (J24) |
| direct investment abroad by goods industries (F23) | decrease demand for low-skill labor in the U.S. (F66) |
| direct investment in service industries (L80) | increase a firm's share of production (D21) |
| type of industry (goods vs. services) (L89) | determines the impact on labor demand (J23) |
| comparative advantage of U.S. firms in service industries (L89) | does not align with the comparative advantage of the U.S. as a country (P19) |
| direct investment in service industries (L80) | less influence on labor demand in the U.S. (J49) |