Can country continuously compete on cheap labor cost? A system dynamics approach to FDI policy analysis

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Southern New Hampshire University
This paper studies the interaction of FDI, wages and employment of workers under different policies in countries that use cheap labor cost strategies such as Thailand. The interactions are analyzed by using system dynamics modeling. The model simulation shows that FDI drives salaries up when the demand for workers reaches the limit of the working population. A higher salary, in turn, causes low labor cost seeking FDI to withdraw their investment. Government policies aimed to sustain cheap labor cost seeking FDI are examined. Policies to subsidize foreign operation such as providing tax breaks and reducing the time to set up a new firm can stimulate FDI in the short term but in the long term the foreign firms still withdraw their investments due to high salaries. An increase in the working population or a reduction in firm hiring process time, on the other hand, does not affect the volume of FDI. Thus, the country cannot rely on a low labor cost strategy on the long term.
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