Wage implications of foreign direct investment with salary adjustment process

Abstract

The main objective of this thesis is to analyse theoretically the implications of increasing foreign direct investment (FDI) on the wages of workers and on the profits of firms in the local country which is previously studied in Saglam and Sayek (2011). In this study, we modify the Kelso and Crawford’s salary adjustment process. Firstly, capacity constraint of firms is introduced into the Kelso and Crawford’s salary adjustment process. Secondly, we study the process where workers make offers. Existence of stable matching is explored. In the process where firms offer, the matching converges to a stable matching but in the process where workers offer, stability may not hold. While analysing the implications of increasing FDI on the wages and on the profits in the local country, we use the firm-proposing salary adjustment process with capacity constraint. Our analysis shows that under certain assumptions workers and foreign firms benefit from increasing presence of foreign direct investment while domestic firms may lose profits.