Labor Heterogeneity and the Risk of Expropriation in Less Developed Countries

Following the notion of skill-biased FDI flows from developed to less developed regions, high-skilled workers are likely to benefit from FDI to a larger extent. They earn a productivity advantage that potentially transfers into a skilled wage premium. This gives rise to distributional conflict that might turn into heterogeneous attitudes toward FDI inflows in line with skill. In this paper I study the effect of less developed countries’ skill compositions on the risk of expropriation. Not surprisingly, it turns out that the risk of expropriation decreases with a larger employment share of high-skilled workers. However, in a theoretical model, the effect is diminishing and even turns negative in the empirical investigation - if the relative supply of high-skilled labor is too large, the skilled wage premium turns negative despite the skill-bias of FDI. Then, high-skilled workers’ positive attitudes toward FDI vanish.