Labor Costs and Foreign Direct Investment: A Panel VAR Approach

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Bayraktar-Saglam B., SAYEK BÖKE S.

ECONOMIES, vol.5, no.4, 2017 (ESCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 5 Issue: 4
  • Publication Date: 2017
  • Doi Number: 10.3390/economies5040036
  • Journal Name: ECONOMIES
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus
  • Hacettepe University Affiliated: Yes


This paper examines the endogenous interaction between labor costs and Foreign Direct Investment (FDI) in the OECD countries via the Panel VAR approach under system GMM estimates for the period 1995-2009. The available data allows identifying the relevance of the components of labor costs, and allows a detailed analysis across different sectors. Empirical findings have revealed that sectoral composition of FDI and the decomposition of labor costs play a significant role in investigating the dynamic association between labor costs and FDI. Further, results suggest that labor market policies should focus on productivity-enhancing tools in addition to price hindering tools.