Heterogeneous Labor Market Effects of Foreign Capital Inflows: Gendered Responses and Institutional Moderation in Developing Economies

Abstract

Labor force participation (LFP) determines productivity and long-run economic growth, however, particularly in developing economies, foreign capital inflows (FCIs) such as foreign direct investment (FDI), international remittances (REM), and official development assistance (ODA), despite supplementing domestic investment and facilitating technology transfer, may have heterogeneous effects on overall labor force participation (LFP), female labor force participation (FLFP), and male labor force participation (MLFP), conditional on institutional quality (IQ). This study examines how these FCIs affect LFP, with a specific focus on the moderating role of IQ. Using a sample of 65 developing economies for the period of 2003 to 2021, the study employs PCSE regression technique to estimate the relationships. The findings confirm a significant heterogeneity across FCI-types and genders. Specifically, REM has a significant negative effect on LFP, with considerably stronger income-disincentive effects on FLFP. Conversely, FDI increases LFP, suggesting that it improves domestic labor-absorptive capacity by increasing productivity and job opportunities, with substantially stronger effects for FLFP. Similarly, ODA has weak and inconsistent effects on LFP, with significant impact on FLFP while reducing MLFP. Additionally, IQ directly improves FLFP but is associated with lower MLFP, revealing distinct institutional limitations and prospects across genders. Likewise, improvements in IQ weaken the employment effects of FDI and ODA, particularly for women, without significantly altering the disincentive effects of REM. Collectively, the findings reveal that labor-market responses to FCIs are gendered and conditional IQ, emphasizing the need for gender-specific and institutionally aligned policies to ensure the efficient allocation of FCIs and sustainable development.

Keywords:

Foreign Direct Investment, International Remittances, Official Development Assistance, Institutional Quality, Labor Force Participation, Foreign Capital Inflows, Deve loping Economies