Technological diffusion and skill-biased technological change caused by foreign direct investment in EU Transition Economies

This paper presents a model which captures the technological spillovers created by foreign direct investment in Transition Economies. Skill-biased technological change is linked with endogenous labor supply which allows for unemployment. The technological spillover is divided into a neutral technological change and a skill-biased technological change. The first effect makes labor and capital more productive. The latter increases the productivity of skilled workers. This rises the demand for skilled workers and results in an increased skill-premium. Both effects should be able to explain a large fraction of the observed GDP growth in EU Transition Economies. Elastic labor supply allows us to explain how the observed increasing unemployment of unskilled workers is caused by skill-biased technological change. The empirical relevance of the model can be tested by calibrating it to empirical data for Central and Eastern European Transition Economies which became EU members.