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Industrial Transformation with Heterogeneous FDI and Human Capital

Research output: Working paperDiscussion paper

Publication date09/2015
Place of PublicationManchester
PublisherCentre for Growth and Business Cycle Research, University of Manchester
Number of pages75
<mark>Original language</mark>English


This paper examines industrial transformation using an imitation-innovation growth model with a stylised internalisation framework developed to determine the composition of heterogeneous foreign multinationals in a developing host economy. A key feature of the model is the introduction of a dichotomous relationship between domestic and foreign ?firms, where the latter, each of which consisting of an expert bringing either standardisation or sophisticated know-how, perceives heterogeneity among the productivity of domestic workers. Productivity is a transformation of ability, hence linking the skills acquisition decision and foreign subsidiaries? operational mode choice along the same ability distribution. Calibrated for Malaysia, the simulations uncover complementarities between labour market and FDI-promoting policies. These complementarities are stronger in an environment with endogenous technological change.