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Labour Cost and Foreign Direct Investment-Evidence from India

The Article, Published by Yu-Cheng Lai & Santanu Sarkar in Indian Journal of Industrial Relations, 46(3), 2011, 396-411, 2012

This study measures the effect of labour cost on foreign direct investment in India and finds out whether the foreign owned firms pay higher wages than their domestic counterparts. The estimation has been done by the Ordinary Least Square (OLS) technique. Data suggest that after controlling the output, the lower average wage attracts foreign investment in a firm implying that India enjoys comparative advantages of low labour cost which enables her to lead in product competition globally. Second, Indian firms will have efficiency wage to encourage employees to produce higher output. In addition, the foreign owned firms in India pay higher wages than their domestic counterparts. The firms with higher ratio of foreign ownership pay more wages than the firms having lower ratio.