This article examines whether inward Foreign Direct Investment (FDI) is a source of wage inequality between skilled and unskilled labour in developing countries. Although the literature has explored wage inequality issues, we studied the impacts of FDI on skill upgrading comprehensively, together with trade and other factors (such as FDI externalities). Specifically, our analysis introduces the origin of FDI, controls for plant heterogeneity and relates the results to the FDI theory on Multinational Enterprises (MNEs). The results show that, on average, FDI caused wage inequality because of FDI-led skill-biased technological change. However, Japanese and Taiwanese investments helped to alleviate the inequality. Japanese and Taiwanese FDI is motivated by cost advantages achieved through vertical FDI and thus increases relative demand for unskilled labour.
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