This dissertation consists of three essays investigating the impact of inward
Foreign Direct Investment (FDI) in a developing country. Using panel data for Mexican
manufacturing plants, I investigate how FDI affects domestic plantsí productivity; ask
whether there is a link between productivity and wages; and estimate how trade policy
affects investment and productivity at the plant level.
The second paper tests whether the wage premium associated with foreign
ownership is due to foreign firmsí attempts to prevent worker turnover and associated
technology leakage, or simply due to sorting of higher ability workers into foreign-owned
plants. This paper provides a framework for testing the worker-stealing hypothesis by
exploiting the different predictions worker-stealing and worker-heterogeneity yield
regarding the relationship between productivity and wages, and productivity and
employment. I find evidence supporting the worker-stealing hypothesis. Tests between
the worker-stealing and worker-heterogeneity models support the former. However, this
behavior is not limited to foreign-owned plants, and only explains a small fraction of the
average wage difference between foreign and domestic plants.
The first paper estimates the effects of FDI on the plantís productivity (the ownplant
effect) and on other plantsí productivity (spillover effects). Using plant and
industry price-cost markups to control for differences in market power and sorting of