Lower labour costs make countries with abundant skilled and/or unskilled workers more competitive and attractive, and are likely to encourage FDI inflows (Jun & Singh, 1996). For firms that use labour intensively in their production process and for which those labour costs present a large proportion of their total costs, production abroad in low-labour cost countries provides a cost advantage compared to potential competitors from the home country (Dunning & Lundan, 2008; Navaretti & Venables, 2004). However, previous empirical studies about the FDI–labour cost relationship do not present clear-cut results. There is some evidence of a negative relationship between labour costs and FDI activities in the host economies (Bevan & Estrin, 2004; Wei & Liu, 2001), but several studies did not offer convincing evidence with regard to the hypothesis that inward FDI is negatively associated with higher labour costs in the host country (Jun & Singh, 1996). Biswas (2002) indicated that low wages are not necessarily crucial for FDI, and that other factors such as e.g., natural resources or a large market, also influence FDI inflows. Similarly, Meyer (1995) argued that MNEs in Central and Eastern Europe are not necessarily motivated by low labour costs. Veugelers (1991) even showed that labour costs are not an important determinant for FDI inflows.
Due to insufficient data on labour costs/wage rates in Cambodia and the home countries, average labour productivity, measured by real GDP divided by labour force, will be used as a proxy variable for the real wage rate. Some authors have used average labour productivity as a proxy for the real wage rate