The limitations of low labour costs as an inducement to foreign direct investment: an example from the motor industry Available to Purchase

Using the example of the motor industry in Poland, attempts to explain why foreign direct investment (FDI) has, in this sector, during the post‐reform period (i.e. since 1990) remained rather low. This is despite the fact that the labour costs are a small fraction of those in advanced economies. Argues that other factors frequently outweigh the comparative advantage of low labour costs. Suggests the following factors: low labour productivity; internally‐controlled labour costs of an enterprise on average account for only 14 per cent per unit cost of a compact model; transport and related costs of imports; low volume production, and the necessity of substantial, ever‐increasing amounts of flexible, high‐tech equipment for start up. In combination, these factors help explain why unit costs in “non‐technology frontier areas” are frequently in excess of those prevailing in the advanced economies, and so act as a disincentive to FDI.