Foreign Direct Investment and Racial Wage Inequality: Evidence from South Africa

This chapter addresses two questions related to the post-apartheid surge of multinational activity in South Africa. Was the influx of foreign investment associated with a widening or reducing of the wage gap between black and white workers? And second, what impact, if any, has greater foreign investment had on the degree of market concentration in the country? Both questions are investigated using a merged data set from South Africa which covers the period 1995–2004 and thus spans the first decade of democratic government. The results indicate that foreign direct investment (FDI) has been associated with a decrease in the racial wage gap during the post-apartheid decade, more particularly in the first five (Mandela) years. A 10 percent greater ratio of FDI to capital stock in an industrial sector, for example, is associated with about a 1 percent smaller racial wage gap. Moreover, there is evidence that FDI is negatively correlated with market power at the two-digit industry level¸ thus providing a mechanism that probably enhanced the public policies of that period to reduce racial discrimination, given a Becker-type explanation that reduced market power tends to decrease the level of discrimination that can be engaged in by employers and/or employees.