Financial globalisation and the labour share in developing countries: The type of capital matters

In this paper, we investigate how de facto financial globalisation has influenced the labour share in developing countries. Our main argument is the need to distinguish between different types of capital in this context as they differ in their effect on the host countries' production process and vary concerning their bargaining power vis-à-vis labour. Our econometric analysis of the impact of foreign direct versus portfolio investment in a sample of about 40 developing and transition countries after 1992 supports this claim. Using different panel data techniques to address potential endogeneity problems, we find that foreign direct investment has a positive effect on the labour share in developing countries, while the impact of portfolio investment is significantly smaller and potentially negative. Our results also highlight that de facto foreign investment cannot explain the decline of the labour share in developing countries over the investigated period.