FDI flows into the OECD countries FDI flows into the OECD countries

This study explores the importance of labor costs as a determinant of foreign direct investments (FDI) inflows among the OECD countries between 2003 and 2012. This group of countries makes up for the largest portion of global FDI inflows and outflows and it is of high importance for international trade and investments. In addition, by the implementation of interaction effects, we investigate under which circumstances a lower cost of labor in the host country attracts FDI. For the purpose of this study, we use panel data on bilateral FDI inflows among 31 OECD countries and different measures of labor costs. Furthermore, the fixed effects method has been applied for the estimation of our model. The results of our study indicate that a lower level of host country’s labor costs draws more FDI into the economy while a higher level of home country’s labor costs increase the amount of FDI deriving from home country. Moreover, the outcome of the interaction effects gives strong evidence that labor costs have a greater impact on FDI inflows into emerging economies but also that, multinational corporations and international investors are attracted by a combination of highly educated employees and a relatively low cost of labor.