Impact of FDI in a Three Sectors Model

Abstract

The present study examines the impact of foreign direct investment (FDI) in a three sectors model economy consisting of an organised sector, semiorganised sector and unorganised sector. If we consider that capital is immobile within sectors then an increase in FDI in organised sector will increases the demand of skilled labour in organised sector, increase the demand of unskilled labour in unorganised sector and decreases the demand of skilled labour in semiorganised sector. Furthermore we consider spillover effect of FDI from organised sector to semiorganised sector. Then we extend the model to situation where capital is perfectly mobile within sectors and find conditions for increasing wage inequality when there is an increase in FDI in organised sector