Capital Account Liberalization, Real Wages, and Productivity
Peter Blair Henry and Diego Sasson
Stanford Graduate School of Business, Research Paper No. 1988
The degree to which developing nations should open their economies is a hotly contested issue, but this research report suggests that easing restrictions on foreign capital investment can promote significant growth in manufacturing productivity and real wages. The authors examined the performance of the manufacturing sectors in 18 developing nations that opened up their stock markets between 1986 and 1993. They found that allowing an influx of foreign investment reduced the cost of capital for business owners, spurred increased investment in equipment, and, by extension, increased investment in the labor force, which led to an average 7 percent increase in the growth rate of worker wages. That growth rate translated into a US$752 increase in wages for each of the three years following liberalization, an increase equal to more than one-quarter of their pre-liberalization salary.
Emerging economies that open their markets to foreign capital investment can expect growth in manufacturing productivity and workers’ wages.