Labor‐Eliminating Technological Progress and Foreign Direct Investment

ABSTRACT Capital‐scarce emerging economies/developing countries often depend heavily on the inflow of foreign direct investment (FDI) to sustain economic growth. However, if a developing economy experiences labor‐eliminating technological change through the adoption of automating technologies in manufacturing, an inflow of capital may replace labor in manufacturing. This, in turn, may compel policymakers to advocate for a foreign investment tax to restrict the inflow of capital. Contrary to this view, we show that in such an environment, wages will rise, and any policy that restricts the inflow of foreign capital does not benefit workers.