Foreign Direct Investment, Structural Change, and Labor Allocation: Comparative Evidence from Asia and Latin America

Significant disparities in labor productivity across sectors in developing countries have been welldocumented, with a notable trend of labor shifting from higher to lower productivity sectors, especially since the 1990s. This paper investigates the relationship between labor shifts and foreign direct investment (FDI), utilizing a decomposition method to analyze labor productivity changes with sector-level data from Latin America and Asia, using five-year averages for the period from 1975 to 2010. The results indicate that FDI significantly contributes to labor misallocation across sectors, primarily driven by growth in the service sector. This misallocation suggests that while FDI has the potential to enhance productivity, it often results in labor moving to less productive sectors, underscoring the complexity of FDI’s impact on structural economic changes in developing regions.