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Contents Introduction

This paper examines whether inward FDI is a source of wage inequality between skilled and unskilled labor in developing countries. While the literature has explored wage inequality issues, we study the impacts of FDI on skill upgrading comprehensively, together with trade and other factors (such as FDI externalities). Specifically, our analysis introduces the origin of FDI, controls for plant heterogeneity, and relates the results to the FDI theory on multinational enterprises. The results show that, on average, FDI caused wage inequality due to FDI-led skill biased technological change. However, Japanese and Taiwanese investments helped to alleviate the inequality. Japanese and Taiwanese FDI is motivated by cost advantages achieved through vertical FDI and thus increases relative demand for unskilled labor.