Foreign Direct Investment Elasticities of Output, Labor, and Wages in Chile: A Simultaneous Equations Approach
Abstract
:1. Introduction
2. Conceptual Framework
3. Method
3.1. Econometric Model
3.2. FDI Elasticities of Output, Labor, and Wages
3.3. Data and Estimation Method
4. Results
4.1. 3SLS Estimates
4.2. FDI Elasticities of Output, Labor, and Wages
4.3. Estimates by Sector
5. Conclusions
- There is a positive and significant effect of FDI on output that is similar to or slightly larger than previous estimates in other countries;
- FDI responds to output increases, and the estimated output elasticity of FDI is large (around 3);
- Through output expansion, FDI increases the demand for labor, an effect that is larger in the case of skilled labor, as the literature on the labor market effects of FDI reports in advanced countries. We do not find the displacement of unskilled labor found in other contexts;
- Our estimates show no statistically significant effects of FDI on average unskilled wages, and the effects of FDI expansion on skilled wages are statistically significant, but not significant in a practical sense;
- The effects of FDI on output and labor are significant for all economic sectors. Although we fail to reject sectoral differences statistically, point estimates suggest effects of FDI that might be particularly relevant for the agriculture-forestry-fishing sector, presumably where productivity differences between FDI and domestic firms are the greatest;
- There are some notable qualitative differences in the economic effects of FDI expansion across sectors, which, to a large extent, are likely driven by sectoral differences in the relative intensity of the use of factors. For example, mining output is relatively sensitive to changes in FDI, whereas mining employment is less sensitive compared to other sectors. On the contrary, the commerce-hotels-restaurants sector has an around-average output elasticity, but a relatively high elasticity of labor with respect to changes in FDI. A caveat here is that these qualitative differences are not statistically significant in our estimates;
- FDI expansion has substantial output and labor effects for realistic scenarios of FDI expansion (say, 2 years of FDI growth given current growth rates).
Author Contributions
Funding
Informed Consent Statement
Data Availability Statement
Acknowledgments
Conflicts of Interest
Appendix A
Variable | Description | Source |
---|---|---|
y | Real regional GDP (Chained volume, CLP thousands of millions of 2013). | Chilean Central Bank. https://si3.bcentral.cl/siete, accessed on 15 June 2021. Available for 2012–2019. |
FDI | Stock of foreign direct investment in the region (Chained CLP millions of 2013). | Chilean Central Bank. Available for 2012–2019. |
qu | Total employed people with less than eight years of schooling in the region. | Chilean National Institute of Statistics (INE), New National Employment Survey (NENE). Available for 2012–2019. |
qs | Total of employed people with eight years of schooling or more in the region. | INE, New National Employment Survey (NENE). Available for 2012–2019. |
qk | Fixed capital consumption in the region (CLP thousands of millions). | Chilean Central Bank. National fixed capital consumption allocated regionally using the regional share in national stock of capital estimated by Cerda (2018). Available for 2012–2019. |
pu | Regional mean annual income of unskilled workers in their main occupation (constant CLP of 2020) | INE, New Supplementary Incomes Survey (NESI). Available for 2012–2019. |
ps | Regional mean annual income of skilled workers in their main occupation (constant CLP of 2020) | INE, New Supplementary Incomes Survey (NESI). Available for 2012–2019. |
pk | Price index of capital goods imports (100 = 2013) | Chilean Central Bank, national data. Available for 2012–2019. |
Year dummies | ||
Excluded instruments | ||
Z1 | Regional population density (population/km2) | National System of Municipal Indicators of the Undersecretariat of Regional Development (SINIM). Available for 2012–2019. |
Z2 | Region’s average years of schooling of unskilled workers | INE, New National Employment Survey (NENE). Available for 2012–2019. |
Z3 | Region’s average years of schooling of skilled workers | INE, New National Employment Survey (NENE). Available for 2012–2019. |
s_j | Share of sector j in regional GDP | Central Bank of Chile. Available for 2012–2019. |
Appendix B
Variable | Description | Source |
---|---|---|
y | Real regional GDP by economic sector (Chained volume, CLP thousands of millions of 2013). | Chilean Central Bank. Available for 1996–2011. |
FDI | Materialized foreign direct investment in the Region by economic sector entered through the Decree Law 600 (thousands CLP of 2020) | InvestChile, available for 1974–2012. |
qu | Total employed people with less than eight years of schooling in the region by economic sector. | Ministry of Social Development and Family, CASEN survey. Available for 1996, 1998, 2000, 2003, 2006, 2009, and 2011. |
qs | Total employed people with eight years of schooling or more in the region by economic sector. | Ministry of Social Development and Family, CASEN survey. Available for 1996, 1998, 2000, 2003, 2006, 2009, and 2011. |
qk | Fixed capital consumption in the region by sector (CLP thousands of millions of 2013). | Chilean Central Bank. Available for 1996–2011. National data for each sector, allocated regionally using the regional share in national stock of capital estimated by Cerda (2018). |
pu | Regional mean annual income of unskilled workers in their main occupation, by economic sector (constant CLP of 2020) | Ministry of Social Development and Family, CASEN survey. Available for 1996, 1998, 2000, 2003, 2006, 2009, and 2011. |
ps | Regional mean annual income of skilled workers in their main occupation, by economic sector (constant CLP of 2020) | Ministry of Social Development and Family, CASEN survey. Available for 1996, 1998, 2000, 2003, 2006, 2009, and 2011. |
pk | Price index of capital goods imports (100 = 2013) | Chilean Central Bank. National data. Available for 1996–2011. |
Year dummies | ||
Z1 | Regional population density (inh/km2) | National System of Municipal Indicators of the Undersecretariat of Regional Development (SINIM). Available for 2012–2019. |
Z2 | Region’s average years of schooling of unskilled workers by economic sector | INE, New National Employment Survey (NENE). Available for 2012–2019. |
Z3 | Region’s average years of schooling of skilled workers by economic sector | INE, New National Employment Survey (NENE). Available for 2012–2019. |
s_i | Share of sub-sector j in regional GDP | Central Bank of Chile. Available for 2012–2019. |
Appendix C
Variable | Description | N | Mean | Std. Deviation | Minimum | Maximum |
---|---|---|---|---|---|---|
y | Real regional GDP by economic sector (Chained volume, CLP thousands of millions of 2013). | 728 | 863.6 | 2214.2 | 0 | 26,787.9 |
IED | Materialized foreign direct investment in the Region by economic sector entered through the Decree Law 600 (thousands CLP of 2020) | 728 | 23,857.8 | 123,137.6 | 0 | 1,622,906.0 |
qu | Total employed people with less than eight years of schooling in the region by economic sector. | 728 | 16,055 | 27,725 | 0 | 200,155 |
qs | Total employed people with eight years or more of schooling in the region by economic sector. | 728 | 41,282 | 104,931 | 11 | 1,068,536 |
qk | Fixed capital consumption in the region by sector (CLP thousands of millions of 2013). | 728 | 157.7 | 422.5 | 1.3 | 5389.9 |
pu/1 | Regional mean annual income of unskilled workers in their main occupation, by economic sector (constant CLP of 2020) | 722 | 3,854,955 | 1,449,861 | 369,702 | 14,656,358 |
ps | Regional mean annual income of skilled workers in their main occupation, by economic sector (constant CLP of 2020) | 728 | 7,015,531 | 3,252,790 | 1,285,626 | 42,421,504 |
pk | Price index of capital goods imports (100 = 2013) | 728 | 104.2 | 14.8 | 87.9 | 134.7 |
Z1 | Densidad poblacional de la región (hab/Km2) | 728 | 47.7 | 85.8 | 0.8 | 451.1 |
Z2/1 | Region’s average years of schooling of unskilled workers by economic sector | 723 | 5.9 | 0.7 | 0.8 | 8.0 |
Z3 | Region’s average years of schooling of skilled workers by economic sector | 728 | 12.5 | 0.8 | 10.3 | 15.8 |
s_1 | Share of agriculture in regional GDP | 728 | 0.059 | 0.049 | 0.000 | 0.169 |
s_2 | Share of fishing and aquaculture in regional GDP | 728 | 0.015 | 0.021 | 0.000 | 0.112 |
s_3 | Share of mining in regional GDP | 728 | 0.182 | 0.204 | 0.000 | 0.673 |
s_4 | Share of manufacturing in regional GDP | 728 | 0.141 | 0.097 | 0.014 | 0.453 |
s_5 | Share of electricity, gas, and water in regional GDP | 728 | 0.031 | 0.023 | 0.010 | 0.110 |
s_6 | Share of construction in regional GDP | 728 | 0.075 | 0.025 | 0.025 | 0.157 |
s_7 | Share of commerce, restaurants and hotels in regional GDP | 728 | 0.065 | 0.030 | 0.020 | 0.175 |
s_8 | Share of transport and communications in regional GDP | 728 | 0.069 | 0.019 | 0.035 | 0.118 |
s_9 | Share of financial and business services in regional GDP | 728 | 0.100 | 0.042 | 0.062 | 0.251 |
s_10 | Share of housing services in regional GDP | 728 | 0.076 | 0.029 | 0.017 | 0.123 |
s_11 | Share of personal services in regional GDP | 728 | 0.116 | 0.042 | 0.033 | 0.215 |
s_12 | Share of public administration in regional GDP | 728 | 0.071 | 0.041 | 0.013 | 0.204 |
1 | Anríquez and López (2007) define unskilled labor as workers with less than eight years of schooling. |
2 | The total derivative of the demand of labor j = (u,s), given the assumption of fixed prices of capital, is: . Equate this expression to the change in the supply of labor j given a change in wages: , and rearrange terms to arrive at Equation (7) in Anríquez and López (2007). Use this result along with Equation (7) above to arrive at expression (8) in this article. As explained in Anríquez and López (2007), this procedure reflects an automatic market-clearing adjustment to changes in the labor market. |
3 | Currently there are 16 regions due to the subdivision of the former I Region of Tarapacá, of the former X Region of Los Lagos (both in 2007), and of the former VIII Region of Biobío in 2018. |
4 | The results are largely robust to the exclusion of Bartik instruments, as well as to the exclusion of the other three instruments (results available upon request). |
5 | National values for 2020: real GDP = 141,174.4 USD MM, unskilled labor = 1.02 MM people, skilled labor = 7.02 MM people. Average unskilled wages = USD 363.1 a month; average skilled wages = USD 717.4 a month. 1 USD = 940.9 CLP (exchange rate of 19 July 2022). |
6 | The estimation output has been summarized due to space limitations but a complete output is available from the authors upon request. |
7 | National values for the AFF sector in 2020: average unskilled wages = USD 336.6 a month; average skilled wages = USD 549.1 a month. 1 USD = 940.9 CLP. (exchange rate of 19 July 2022). |
8 | We are grateful to two anonymous reviewers for raising this point. |
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Variable | Description | N | Mean | Std. Deviation | Minimum | Maximum |
---|---|---|---|---|---|---|
y | Real regional GDP (Chained volume, CLP. thousands of millions). | 104 | 10,150.0 | 15,273.7 | 671.8 | 65,889.0 |
FDI | Stock of foreign direct investment in the region (CLP millions). | 104 | 8008.3 | 14,558.9 | 0 | 59,725.7 |
qu | Total employed people with less than eight years of schooling in the region. | 104 | 120,170 | 127,721 | 9857 | 553,519 |
qs | Total of employed people with eight years of schooling or more in the region. | 104 | 534,972 | 786,255 | 34,879 | 3,519,680 |
qk | Fixed capital consumption in the region (CLP thousands of millions). | 104 | 1334.2 | 1839.6 | 99.8 | 8778.1 |
pu | Regional mean real income of unskilled workers in their main occupation (constant CLP of 2020) | 104 | 3,853,896 | 755,981 | 2,287,214 | 6,368,653 |
ps | Regional mean real income of skilled workers in their main occupation (constant CLP of 2020) | 104 | 7,874,528 | 1,463,036 | 5,658,444 | 11,256,746 |
pk | Price index of capital goods imports. | 104 | 97.2 | 2.4 | 94.2 | 100.8 |
Z1 | Regional population density (inh/km2) | 104 | 64.3 | 124.8 | 1.0 | 514.1 |
Z2 | Region’s average years of schooling of unskilled workers | 104 | 6.2 | 0.2 | 5.7 | 6.9 |
Z3 | Region’s average years of schooling of skilled workers | 104 | 13.3 | 0.3 | 12.6 | 14.2 |
s_1 | Share of agriculture in regional GDP | 104 | 0.052 | 0.045 | 0.000 | 0.136 |
s_2 | Share of fishing and aquaculture in regional GDP | 104 | 0.028 | 0.068 | 0.000 | 0.296 |
s_3 | Share of mining in regional GDP | 104 | 0.151 | 0.172 | 0.000 | 0.537 |
s_4 | Share of manufacturing in regional GDP | 104 | 0.111 | 0.066 | 0.014 | 0.226 |
s_5 | Share of electricity, gas, and water in regional GDP | 104 | 0.033 | 0.021 | 0.005 | 0.081 |
s_6 | Share of construction in regional GDP | 104 | 0.084 | 0.024 | 0.047 | 0.204 |
s_7 | Share of commerce, restaurants and hotels in regional GDP | 104 | 0.082 | 0.034 | 0.032 | 0.184 |
s_8 | Share of transport and communications in regional GDP | 104 | 0.082 | 0.024 | 0.042 | 0.138 |
s_9 | Share of financial and business services in regional GDP | 104 | 0.110 | 0.043 | 0.074 | 0.256 |
s_10 | Share of housing services in regional GDP | 104 | 0.072 | 0.025 | 0.019 | 0.106 |
s_11 | Share of personal services in regional GDP | 104 | 0.126 | 0.042 | 0.042 | 0.213 |
s_12 | Share of public administration in regional GDP | 104 | 0.069 | 0.035 | 0.014 | 0.161 |
Model | |||||
---|---|---|---|---|---|
y | FDI | qu | qs | qk | |
Variable | |||||
FDI | 0.054 *** | ||||
(0.004) | |||||
qu | −0.506 *** | 0.046 | |||
(0.037) | (0.599) | ||||
qs | 0.840 *** | −1.863 * | |||
(0.064) | (1.097) | ||||
qk | 0.538 *** | 0.514 | |||
(0.053) | (0.906) | ||||
y | 3.008 *** | 0.727 *** | 0.914 *** | 0.930 *** | |
(0.578) | (0.046) | (0.028) | (0.027) | ||
pu | −1.725 *** | −1.077 *** | −0.194 | ||
(0.378) | (0.207) | (0.178) | |||
ps | −1.490 *** | −0.393 * | −0.776 *** | ||
(0.391) | (0.214) | (0.183) | |||
pk | 0.514 | −2.834 * | −5.068 *** | ||
(2.580) | (1.591) | (1.553) | |||
Constant | −0.095 | 1.303 | 52.270 *** | 40.222 *** | 37.031 *** |
(0.348) | (5.024) | (12.911) | (7.843) | (7.562) | |
Year dummies | Yes | Yes | Yes | Yes | Yes |
N | 104 | 104 | 104 | 104 | 104 |
R2 | 0.952 | 0.406 | 0.827 | 0.929 | 0.930 |
F Statistic | 228.7 | 9.451 | 49.85 | 142.5 | 141.3 |
Elasticity | Point Estimate | 95% Confidence Interval | |
---|---|---|---|
0.054 | 0.045 | 0.062 | |
0.039 | 0.031 | 0.047 | |
0.049 | 0.041 | 0.058 | |
0.002 | −0.002 | 0.006 | |
0.021 | 0.017 | 0.026 |
Equation | y | FDI | qu | qs | qk |
---|---|---|---|---|---|
FDI | 0.158 *** | ||||
(0.055) | |||||
qu | 0.847 *** | −0.021 | |||
(0.176) | (1.268) | ||||
qs | −0.267 | −2.543 | |||
(0.209) | (1.938) | ||||
qk | 0.078 | −0.212 | |||
(0.094) | (0.607) | ||||
y | 4.333 * | 1.288 *** | 1.301 *** | 1.015 *** | |
(2.305) | (0.101) | (0.079) | (0.095) | ||
pu | −0.171 | 0.656 ** | 1.345 *** | ||
(0.395) | (0.286) | (0.381) | |||
ps | 0.123 | 0.016 | 0.475 *** | ||
(0.168) | (0.120) | (0.162) | |||
pk | 3.158 *** | 2.171 *** | 1.960 ** | ||
(1.004) | (0.814) | (0.932) | |||
Constant | −2.141 *** | 8.613 | −11.370 | −17.882 ** | −39.270 *** |
(0.640) | (7.369) | (9.530) | (7.188) | (9.071) | |
Year dummies | Yes | Yes | Yes | Yes | Yes |
Sector dummies | Yes | Yes | Yes | Yes | Yes |
Sector#FDI variables | Yes | - | - | - | - |
Sector#y variables | - | Yes | Yes | Yes | Yes |
Sector#qu variables | Yes | Yes | - | - | - |
Sector#qs variables | Yes | Yes | - | - | - |
Sector#qk variables | Yes | Yes | - | - | - |
Sector#pu variables | - | - | Yes | Yes | Yes |
Sector#ps variables | - | - | Yes | Yes | Yes |
Sector#pk variables | - | - | Yes | Yes | Yes |
Year#sector dummies | Yes | Yes | Yes | Yes | Yes |
N | 722 | 722 | 722 | 722 | 722 |
R2 | 0.829 | 0.478 | 0.888 | 0.897 | 0.861 |
F Statistic | 63.67 | 9.77 | 58.34 | 97.95 | 78.64 |
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Modrego, F.; Ortega, J.; Planas, L.; Astudillo, Á. Foreign Direct Investment Elasticities of Output, Labor, and Wages in Chile: A Simultaneous Equations Approach. Economies 2022, 10, 295. https://doi.org/10.3390/economies10120295
Modrego F, Ortega J, Planas L, Astudillo Á. Foreign Direct Investment Elasticities of Output, Labor, and Wages in Chile: A Simultaneous Equations Approach. Economies. 2022; 10(12):295. https://doi.org/10.3390/economies10120295
Chicago/Turabian StyleModrego, Félix, Jorge Ortega, Lenia Planas, and Álvaro Astudillo. 2022. "Foreign Direct Investment Elasticities of Output, Labor, and Wages in Chile: A Simultaneous Equations Approach" Economies 10, no. 12: 295. https://doi.org/10.3390/economies10120295