| Foreign Direct Investment (FDI) has been recognized as a key growth factor for the less developing countries (LDCs), thus is a viable solution to the brain drain problem, or the permanent loss of skilled workers through emigration, whose main causes are poverty and lack of job opportunity. FDI brings not only economic growth, job opportunity to the host country but also increase demand for skilled workers, thus helps stem brain drain. This dissertation provides a theoretical framework based on the Grossman-Helpman's Expanding Product Variety model of endogenous growth with the North-South trade, having a wide gap in income and technology. The Northern innovator invests in the imitating South to utilize its cheaper skilled labor force. The model illustrates that FDI and imitation subsidy foster growth in both countries and raise relative wage in the South. Innovation subsidy by the North, however, reduces the relative wage. The labor movement, both skilled and unskilled, either emigrating to the North or being utilized at home by FDI, is shown in the model to support the stylized facts that FDI raises demand for skilled workers and promotes growth while brain drain retards it; and emigration of non-skilled workers does not affect growth in the LDCs. |
