Abstract
The question of complementarity or substitutability of FDI and international labour mobility has not yet been answered. The substitutability assumption does not take into consideration the technological spillover of FDI in the host countries. Moreover, migration flows reveal cultural characteristics and labour force properties of their native country which may stimulate bilateral business networks, strengthening the complementarity assumption between capital and labour flows. In this paper we build a continuous time dynamic model where these offsetting forces are at work. We analyze whether, and to what extent, the increase in labour mobility might affect FDI outflows. A numerical simulation is performed showing that a higher income growth rate corresponds to a higher labour mobility. Some policy implications and further research direction are suggested.
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Notes
This reflects one of the most outstanding features of transition economies, like those involved in European Eastern enlargement.
The absolute value of the inverse of the adjustment parameter \(\left\vert 1/\eta _{i}\right\vert \), may be interpreted as the mean time lag.
See Gandolfo (1996).
Information about the political situation, the existence of more or less good infrastructures, consumer tastes, autocton workers skills, and so on.
While the barriers to capital movement have been quickly removed by mutual agreement, the progress towards free movement of labour is extremely slow particularly referring to the recent enlargement of EU.
In this context, without loss of generality, we simply assume that i(t) = i * = 0.
See Appendix A.
Gandolfo (1997), pag. 221.
See Appendix B.
Let us recall that σ i are rates of growth, being the variables defined in logarithmic form:
$$k=\log K=\mu _{1}+\sigma _{1}t.$$Thus
$$K=e^{\mu _{1}+\sigma _{1}t}=K_{0}e^{\sigma _{1}t}.$$The transition to a regime with higher labour mobility is equivalent to an increase in η 1 or, which is the same, a decrease in the mean time lag.
See Gandolfo (1997), pages 159 and 264.
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A previous version of the paper has been presented at the XVIII Villa Mondragone International Economic Seminar, 26th–27th June 2006, and at EEFS 2006—Fifth Annual Conference, 18th–21st May. The authors thank M. Schiff, G. Gandolfo and two anonymous referees for helpful comments.
Appendices
Appendix A
Given the simultaneous differential equation system in the text (Eqs. 14–16), the characteristic polynomial is the following
where
For a dynamic system to be convergent to a local stable equilibrium, the roots of the characteristic polynomial must have negative real part. A set of necessary and sufficient conditions for all the roots of Eq. 19 to have negative real parts is
It is possible to observe that the first two conditions are immediately satisfied. For the last two conditions to be verified, it is necessary that the following two conditions are satisfied:
and
Let us analyze the four elements of the last condition separately.
The first one is certainly greater than zero given the economic assumptions discussed in the text. So are the second and the fourth element. Their sum thus will be positive. Let indicate that sum with Z
Hence, for the second condition to be verified it is sufficient that
Appendix B
In order to find the particular solution of the model (Eqs. 14–16), we apply the rule of undetermined coefficients.Footnote 14
Given
where
we try as a particular solution of the system
where μ and σ are vectors of coefficients to be determined. We thus obtain
from which
This equation will hold for each value of t if, and only if, the following relations are simultaneously verified
By solving the system, we find the values of μ i and σ i shown in the text.
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Federici, D., Giannetti, M. Temporary Migration and Foreign Direct Investment. Open Econ Rev 21, 293–308 (2010). https://doi.org/10.1007/s11079-008-9092-6
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DOI: https://doi.org/10.1007/s11079-008-9092-6