INTEGRATION, FOREIGN DIRECT INVESTMENT AND LABOUR MARKETS: MICROECONOMIC PERSPECTIVES by NOEL GASTON Bond University, Queensland and DOUGLAS NELSON* Murphy Institute of Political Economy, Tulane University, and Centre for Research on Globalisation and Economic Policy Foreign direct investment (FDI) has grown far more rapidly than trade during the last two decades. As with the other prominent features of globalization, FDI is controversial. The impact of FDI on labour markets has been of growing concern, in particular for source countries. The deterioration of labour market conditions for unskilled workers in many OECD countries during the 1980s and 1990s was a primary catalyst for the concern. With regard to its impact on labour markets, FDI may have e¡ects that, at least in the short and medium run, may well dwarf the e¡ects of trade and immigration. In this paper, we review the economic theories and econometric evidence which purport to explain various aspects of the impact of FDI on labour markets. The emphasis is on two partial equilibrium models which, respectively, focus on the location decisions of multinationals and the impact of global ¢rms on collective bargaining outcomes. " Introduction Foreign direct investment (FDI) grew far more rapidly than trade in the last two decades of the last century (e.g. see Lawrence, 1996). As with the other prominent features of globalization, FDI is controversial. The impact of FDI on labour markets has been a growing concern, in particular for source countries. The deterioration of labour market conditions for unskilled workers in many OECD countries during the 1980s and early 1990s was a primary catalyst for the concern. 1 With regard to its impact on labour markets, FDI may have e¡ects that, at least ß Blackwell Publishers Ltd and The Victoria University of Manchester, 2002. Published by Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK, and 350 Main Street, Malden, MA 02148, USA. 420 The Manchester School Vol 70 No.3 June 2002 1463^6786 420^459 * Prepared for Leverhulme Centre for Research on Globalization and Economic Policy Conference, 28^29 June 2001, University of Nottingham. We would like to thank the organizers and participants of that conference and, in particular, the discussant Tim Harcourt. 1 Gaston and Nelson (2001) argued that an obvious reason for the intensity of interest in issues dealing with the distribution of earnings is that the apparent increases in earnings inequality were not o¡set by higher average earnings. The bottom deciles of the income distribution were not `dragged up'; in fact there were absolute declines in earnings at the bottom of the earnings distribution (most notably for the USA and UK). Also, countries