World Development 128 (2020) 104847

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World Development
journal homepage: www.elsevier.com/locate/worlddev

International linkages, technology transfer, and the skilled labor wage

share: Evidence from plant-level data in Indonesia
Mahmut Yasar a,⇑, Roderick M. Rejesus b
a
The University of Texas at Arlington, and Emory University, College of Business, Department of Economics, 701 S. West Street, Arlington, TX 76019, United States
b
North Carolina State University, Nelson Hall, 2801 Founders Drive, Raleigh, NC 27695, United States

a r t i c l e i n f o a b s t r a c t

Article history: This paper examines whether technology transfer through international linkages (such as the importing
Accepted 17 December 2019 of intermediate inputs and foreign direct investments) influences skilled labor wage shares in Indonesian
plants. Using a variety of specifications, estimators, and robustness checks (including Correlated Random
Effects Probit, quantile fixed effects regression, and a moment-based instrumental variable (IV)
JEL classifications: approach), we find that the import of intermediate inputs and foreign direct investment likely facilitate
F14 the transfer of technologies from advanced nations, which then results in skill-biased technological
D24
change and increased relative skilled labor wage share. These results indicate that, contrary to standard
L24
J24
trade theory predictions, international linkages can lead to increased demand for skilled labor and a
J31 potential widening of the skilled-unskilled labor wage gap in Indonesia. Our findings support the theo-
O14 retical explanation provided by Acemoglu (2003). Since firms in developing countries like Indonesia
mainly rely on technologies from advanced nations, trade is likely to increase (rather than decrease)
Keywords: the skilled wage premium.
Skill-biased technological change Ó 2019 Elsevier Ltd. All rights reserved.
Technology transfer
Correlated Random Effects Probit
Fixed Effects Quantile Regression
Indonesia
Asia

1. Introduction
Identifying the determinants of the growing demand for skilled
labor (or firms’ so-called ‘‘skill-upgrading” behavior) has been an
important issue in the industrial organization, international trade,
and labor economics literature over the years, especially in the cur-
rent era of increasing global market integration. Ever since
Griliches (1969) seminal work that recognized a positive relation-
ship between skilled labor use and capital deepening (i.e., the
‘‘capital-skill complementarity” relationship), a number of
researchers have empirically confirmed this connection and have
sought to find the major factors that explain it (specifically, the fac-
tors that drive increases in skilled labor demand). (See Berman,
Bound, & Griliches, 1994; Autor, Katz, & Kreuger, 1998; Machin &
⇑ Corresponding author.
E-mail addresses: myasar@uta.edu (M. Yasar), rmrejesu@ncsu.edu
(R.M. Rejesus).
Van Reenen, 1998; Haskel & Heden, 1999; and Hollanders & ter
Weel, 2002).1
Overall, empirical evidence from industrialized/developed
countries indicates that technological innovation that is biased
toward skilled labor (i.e., high tech capital improvements such as
computers and computer-related technologies) is the most domi-
nant factor behind the increased demand for skilled labor (espe-
cially in the 1980s and 1990s). (See Berman et al., 1994; Doms,
Dunne, & Troske, 1997; Betts, 1997; Haskel & Heden, 1999;
1
Understanding the factors that affect firms’ skill-upgrading is important because
it has critical implications for the size of the wage gap between skilled and unskilled
workers. Increasing demand for skilled labor (as firms use more capital) is typically
expected to increase the wages of skilled labor and, consequently, result in the
widening of the skilled-unskilled labor wage gap. Therefore, this crucial linkage
between skilled labor demand and the wage gap between skilled and unskilled labor
also underpins the significance of the determinants of skilled labor demand because it
may provide policy lessons to help address this wage gap issue. It is important to note,
however, that in this paper we only directly test the effect of factors (e.g.,
international linkages) on skilled labor demand (and not the wage gap per se). The
existence of an empirical relationship for the former has implications for the latter,
but the relationship to skilled labor demand does not necessarily mean that the wage
gap increases.

https://doi.org/10.1016/j.worlddev.2019.104847
0305-750X/Ó 2019 Elsevier Ltd. All rights reserved.
2 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847
Bresnahan, Brynjolfsson, & Hitt, 2002; and Leiponen, 2005). In
industrialized nations, these technological improvements have
been driven by capital growth and are typically associated with
in-country research and development (R&D) efforts.
In developing countries like Indonesia, however, there is very
limited in-country R&D that can facilitate skill-biased technologi-
cal change. Yet, at the same time, there are empirical studies that
still suggest these countries are also experiencing an increasing
demand for skilled labor as capital grows.2 This has led many to
question the narrative that ‘‘skill-biased technological change” is
the main factor in driving skill-upgrading by firms in developing
countries. It has been argued that firms in developing countries typ-
ically do not have the level of in-house R&D to produce skill-biased
technological innovations (Basant & Fikkert, 1996; Hershberg,
Nabeshima, & Yusuf, 2007; Yasßar and Morrison Paul, 2012; Yasar,
2013). Hence, it is unlikely that the main source of skill-upgrading
in developing countries is this kind of ‘‘in-county” R&D-based tech-
nological change. Instead, such technological changes (and conse-
quent skill upgrading) are more likely to be derived specifically
from international linkages (i.e., technology transfer through import-
ing intermediate/capital inputs and foreign direct investments
(FDIs))—the so-called ‘‘skill enhancing trade” hypothesis (Goldberg
& Pavcnik, 2007). However, the role of international linkages in the
skill-upgrading of firms or plants in developing countries is not
empirically well understood and, to the best of our knowledge, no
consistent relationship has been found across studies.3
The ‘‘international linkages-skill upgrading” relationship has
been explored in previous studies, but the results have been largely
mixed. A paper on Chile by Pavcnik (2003) does not find any
strong, statistically significant relationship between international
linkages and skilled labor wage shares. Results for Peru from
Mazumdar and Quispe-Agnoli (2004, 2019) indicate that higher
levels of importing (especially of intermediate inputs) statistically
decrease (rather than increase) the demand for skilled labor.
Results from Amiti and Cameron (2012) for Indonesia show that
the decrease in input tariffs leads to lower wages for skilled work-
ers relative to the wages of production workers for the firms that
import their intermediate inputs. In contrast, evidence from
Bustos (2011) for Argentina, Demir (2010), Meschi, Taymaz, and
Vivarelli (2011), and Turco and Maggioni (2013) for Turkey, and
Lee & Wei (2015) for Indonesia all suggest that improved interna-
tional linkages through importing or FDI channels can lead to
higher relative skilled labor wage shares (e.g., skill-upgrading).
The results from these latter studies tend to support the notion
that technology transfer is the mechanism through which interna-
tional linkages positively influence skill upgrading. Note, however,
that the studies above used a variety of different estimation proce-
dures (some of which do not properly account for different sources
of endogeneity and/or the typically fractional (non-linear) nature
of the skilled labor wage share variable). In addition, the time peri-
ods that the data utilizes (as well as the developing country of
interest) also vary widely across studies. These factors may have
contributed to these largely mixed results.
Furthermore, as we discuss in the next section, the previous
firm-level studies highlighted above were largely based on a con-
ceptual framework from standard trade theory, which predicts that
trade tends to decrease, rather than increase, the skilled-unskilled
2 1990s is likely different compared to the early to late 2000s. Hence,
By using plant-level data from the Turkish manufacturing industry, for instance,
Yasar and Morrison Paul (2008) find that higher capital machinery intensity and
computer use leads to a greater skilled labor share and wage (i.e. the ‘‘capital-skill or
technology-skill complementary”).
3 4
Using industry-level data from the US, Feenstra and Hanson (2002) indicate that
both technological change and international linkages through trade (i.e., specifically,
importing) are both potential sources of skill-upgrading. Note, however, that the
aforementioned study focuses on an industrialized country (US) context, rather than a
developing country context. See the preceeding section.
labor wage gap in developing countries. In contrast, our study is
based on several more recent theoretical studies that highlight
potential economic mechanisms through which international link-
ages can influence skill-upgrading in developing countries. Unlike
standard trade theory, these new theories suggest that trade leads
to higher skilled wage premiums in countries with either abundant
skilled labor or with scarce skilled labor. The skill-upgrading pre-
sent in developing countries, however, is due to international link-
ages rather than in-house R&D expansion.
The main objective of this article is to examine whether interna-
tional linkages (i.e., through importing of intermediate inputs and
FDIs) directly affect the skill-upgrading behavior of firms in a par-
ticular developing country—in this case, Indonesia. We consider
this in light of the theoretical predictions from recent literature
(highlighted in the next section), which all predict that technology
transfers have a positive impact on skill-upgrading in the context of
developing countries. We posit that international linkages facilitate
technology transfers, which in turn leads to increased demand for
skilled labor (i.e., skill-upgrading). This objective is achieved by uti-
lizing 2001–2007 plant-level manufacturing data from Indonesia
and estimating a skilled-labor share equation derived from a cost
function specification (Berman et al., 1994; Siegel, 1997; Paul &
Siegel, 2001; Hollanders & ter Weel, 2002). Using a variety of econo-
metric estimators and robustness checks that account for potential
endogeneity from various sources, as well as the fractional nature of
the skilled labor share variable, we find that international linkages
(such as imports of intermediate inputs and FDIs) are positively and
significantly associated with the skill-upgrading of plants in
Indonesia. We also find heterogeneity in the international linkage
effect, where firms that use more skilled labor are impacted more
by internationalization than those that use less skilled labor.
Our study contributes to the literature in several respects. First,
we focus on the case of a specific developing country—Indonesia—
that, as mentioned above, has a different economic environment
compared to industrialized nations (such that the drivers of skill-
upgrading may be different than those in developed countries).
Although there have been a number of previous studies that also
focus on developing countries (Chile, Peru, Turkey, etc.), we argue
that there is heterogeneity in the economic environments (and
development paths) across developing countries, such that some-
thing could still be learned by specifically examining the Indone-
sian case. In particular, Indonesia’s economic environment is
such that it has the following unique characteristics:4 (i) it is a large
middle-income country where trade (specifically manufacturing
exports) is a major driver of economic growth, (ii) international trade
was increasingly liberalized in the early 2000s that helped reduce
the high costs of doing international business in the country, and
(iii) the preferential trading partners of Indonesia is a mix of both
developed (e.g., Japan and Korea) and neighboring developing coun-
tries (e.g., Philippines, Malaysia, etc.). Therefore, Indonesia is an
interesting case to study the ‘‘skill enhancing trade” hypothesis
because it is a large developing country with a sizable labor force
and the share of trade in the country’s income is high. Moreover, ear-
lier studies that focused on Indonesia also typically used data peri-
ods from the early 1990s to the early 2000s, and so our use of the
data from 2001 to 2007 may also generate new, different, and more
accurate insights.5 The economic environment (i.e., industrial trad-
ing mix) and development trajectory of Indonesia in the early
See Takii (2019) for more information.
5
Previous studies that used the Indonesian plant-level data covered the time
period from 1991 to 2002 (e.g. Amiti & Cameron, 2012) or the 1996 and 2006 census
years (e.g. Kasahara et al., 2016). Also, Lee and Wie (2015) use aggregate data for two
periods in the 2000s (with only about 350 observations).
 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847
the present study can still serve as a complement to these earlier
studies of internationalization-induced skill-upgrading.
Second, we use a plant-level data set, in contrast to the much
more common aggregate (i.e., industry-level) data used in the liter-
ature. For example, although Lie and Wie (2015) also focus on
Indonesia, they use aggregate industry-level data for about 200
five-digit manufacturing industries (e.g., not the data for the manu-
facturing plants) across only two periods in the 2000s (with about
350 observations). Inferences from plant-level data can produce
very different estimates and insights as compared those that use
more aggregate industry-level data. The use of aggregate industry-
level data can mask variation in firm-level characteristics and
behavior, which can then produce misleading results. Holderness
(2016) have shown that using aggregate data to study individual
firm behavior can distort estimation standard errors, weigh individ-
ual firms arbitrarily (depending on the composition of the data used
to aggregate), and often cannot control for all relevant individual
firm-level determinants. Model assumptions based on individual
firm behavior also sometimes does not hold when using aggregate
data. These factors can then easily lead to inaccurate conclusions
when using aggregate data. Therefore, our use of plant-level data
arguably generates more reliable estimates of the individual firm-
level skill-upgrading effects of improved international linkages.
Third, we utilize more recent empirical estimation approaches
that have not been previously used in earlier studies to address
inherent limitations of the estimation procedures used before and
to producer more accurate estimates of the marginal effects of
international linkage variables on skilled labor wage share. For
example, we use a correlated random effects (CRE) Probit model
that can simultaneously account for: (1) endogeneity due to poten-
tial correlation of time-invariant unobservables (e.g., unobserved
heterogeneity) with observable covariates, and (2) the fractional
nature of the typical skilled labor share outcome of interest
(Wooldridge, 2016). Earlier studies in the ‘‘skill enhancing trade”
literature do not address both the fractional nature of the skilled
labor share variable and unobserved heterogeneity at the same
time, which can lead to misleading inferences. In addition, we uti-
lize a recently developed moment-based IV estimator that allows
us to account for endogeneity due to both time-varying and time-
invariant unobservables that can be potentially be correlated with
the observable explanatory variables (Lewbel, 2012). Previous stud-
ies typically do not account for endogeneity due to time-varying
unobservables. A two-step quantile fixed effects (FE) approach
(Canay, 2011) is also used to explore whether there is heterogeneity
in the effect of international linkages on skilled labor demand
depending on the firm’s location on the conditional skilled wage
share distribution (e.g., whether the effect of the linkages is differ-
ent for firms with lower skilled wage shares vs. firms with greater
skilled wage shares). Investigating the impact heterogeneity of
international linkage variables at different points (or quantiles) of
the skilled wage share distribution is a new and novel contribution
to the literature (i.e., previous literature only focus on the effect at
the mean). Therefore, the use of these newer estimation methods
on micro-level plant data likely provides better insights and more
accurate estimates on how international linkages can affect skill-
upgrading in Indonesia, which can then complement earlier studies
on different countries and different time periods.
2. Conceptual framework: international linkages & skill-
upgrading in developing countries
As mentioned in the previous section, we posit that the type of
skill-biased technological change in developing countries is one
where technology innovation is due to international linkages (e.g.,
importing and FDIs) rather than ‘‘in-country” or ‘‘within-firm”
R&D investments. This ‘‘international-linkage-driven” technological
3
innovation may thus be a major factor that influences the skill-
upgrading behavior of firms in developing countries like Indonesia.
There are a number of recent theoretical studies that suggest
potential economic mechanisms for which international linkages
can influence skill-upgrading in developing countries. However,
it is important to first point out that standard trade theories (i.e.
Heckscher-Ohlin model) predict that growth in international link-
age activities (i.e., through improved trade openness) tend to
decrease, rather than increase, the skilled-unskilled labor wage
gap in developing countries.6 This suggests that, based on standard
trade theories, international linkages should not positively influence
skill-upgrading in developing countries. However, as explained in
detail below, there are recent studies that explain how these link-
ages can actually increase skill-upgrading (and, potentially, the
skilled-unskilled wage gap).7
For example, Feenstra and Hanson (1997) provide a conceptual
framework in which outsourcing by multinational firms from
industrialized nations shifts the production in a developing coun-
try toward relatively skill-intensive goods. This drives demand
for skilled labor among the firms in developing countries and in
turn leads to an increase in the relative wages of these skilled
workers. Since the outsourced inputs are considered unskilled
and labor-intensive in the industrialized countries but relatively
skill-intensive in developing countries, the skill premium increases
in both countries. Similarly, Feenstra and Hanson (2002) reasoned
that the increased use of intermediate goods stemming from the
‘‘global production sharing” shifts the demand toward skilled labor
(in developing countries) and away from the unskilled labor, lead-
ing to increased skill premium.
Sachs and Shatz (1998) also showed that the wage gap between
skilled and unskilled labor can increase in both developed and devel-
oping countries following trade liberalization (i.e., as the trade in
intermediate materials increases and international linkages
improve), suggesting that trade (or international linkages) has a pos-
itive effect on skill-upgrading by firms. According to Xu (2003), the
surge in developing countries’ imports from the industrialized
nations (i.e., as a result of the trade liberalization) leads to an
increased demand for skilled workers in those countries. This likely
leads to a higher cost of skilled labor in the industrialized countries,
and results in an export expansion by the developing countries as
well. Consequently, the demand for skilled labor and in turn the
6
The logic of this expected decrease in the skilled-unskilled wage gap from
standard trade theories is as follows, which is explained in various books (see, for
instance, Pugel (2007)). A shift from autarky to free trade changes the prices of the
traded products. According to the Stolper and Samuelson theorem, a rise in the price
of a good increases the return to the factor that is used intensively in the production
of that good, and reduces the return to the factor that is not used intensively in the
production of that good; the scarce factor of production loses and the abundant factor
gains. Thus, when a country moves from autarky to free trade, the prices of the
country’s exports will increase and the prices of its imports will fall. Advanced nations
have a comparative advantage in producing high-skill-intensive goods (i.e., because
they are rich in capital and skilled labor) and the developing countries have a
comparative advantage in producing low-skill-intensive goods (i.e., because they are
abundant in unskilled labor). Thus, for instance, before trade, the prices of machines
(a high-skill-intensive good) are lower in an advanced nation and the price of cloth (a
low-skill-intensive good) is lower in a developing country. When these two countries
start trading, the relative prices of machines will increase in the advanced nation and
the relative price of cloth will rise in the developing nation. According to standard
trade theories, this will lead to an increase in real return to the factor used intensively
to produce the goods that these countries export and a decrease in the real return to
the factor used intensively to produce the imported goods. Consequently, the wages
of the unskilled worker will decline in advanced nations and increase in developing
nations. In the developing countries, the abundant factor, low-skilled labor, benefits
from trade. These countries have a comparative advantage in the low-skilled labor-
intensive sector. The additional demand from the developed countries increases the
prices of these goods, and thus raises the wages of the unskilled workers (lowering
the wage-gap in the developing country). See Fukase (2013) for empirical evidence in
support of this theory.
7
See Goldberg and Pavcnik (2007) for an excellent review.
4 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847
wages of skilled labor in all countries are likely to increase. Zhu
(2004), and Zhu and Trefler (2005) argued that over time, as the pro-
duction of the unskilled-labor-intensive products moves from
industrialized to developing nations, the relative demand for skilled
labor increases, since the shifted production is still relatively skill-
intensive for the developing countries. This, in turn, leads to
skilled-labor wage premiums in developing countries.
Beaulieu, Benarroch, and Gaisford (2004) also provide a model
that incorporates both inter- and intra-industry trade between
the developed and developing countries when analyzing the
impact of trade liberalization (or international linkages) on the
skilled-unskilled labor wage gap impact. The study indicates that
reduction in trade barriers within the high-tech sectors of two
regions would likely increase trade in both, which will then fuel
demand for more high-tech products and for the skilled labor to
produce these products. In this case, real wages in both regions
increase for skilled labor but decline for unskilled labor.
According to Acemoglu (2002a, 2002b, 2003), trade is likely to
increase the relative price of skill-intensive goods in developed
countries. This incentivizes the producers of these goods to upgrade
their skill-complementary technologies. Thus, the resulting skilled-
biased technological change leads to an increased wage differential
between the skilled and unskilled labor. The wage gap increases in
developing countries as well, since they transfer and adapt these
skill-complementary technologies developed in the industrialized
nations. Moreover, by developing a dynamic model of innovations,
Thoenig and Verdier (2003) show that globalization can lead to
defensive skill-complementary innovations and can consequently
increase wage differentials between skilled and unskilled labor in
both developed and developing countries. This suggests that skill-
upgrading is also likely present in developing countries, but it
may be due to international linkages rather than in-house R&D
expansion.
Since developing countries rely on technologies developed
mainly in the US and other industrialized nations, trade could
increase skilled labor demand and potentially increase the wage
inequality in these countries (e.g., rather than reduce the wage
gap as predicted by standard trade theory). The increase in the
international engagement that results in the flow of intermediate
products, services, direct investment, and adaption and the
upgrading of new technologies leads to a shift in demand toward
skilled labor, raising the relative wages of the skilled workers. As
highlighted by Acemoglu (1998, 1999) the further increase in skills
over time would lead to a persistent, gradual skill-biased techno-
logical change in these countries, stemming from the faster adop-
tion and upgrade of skill-complementary production, marketing,
and organization methods. Consequently, demand for skilled labor
will increase, potentially leading to a higher skilled labor wage pre-
mium. All the studies presented above show that improved inter-
national linkages through trade can positively affect skill-
upgrading in developing countries. This is the main hypothesis
we want to empirically test in the present study.
3. Description of the data
The source of the establishment-level (or plant-level) data used
in this paper is the Survei Tahunan Perusahaan Industri Pengolahan,
which is an annual survey of manufacturing establishments in
Indonesia conducted by Badan Pusat Statistik (BPS). This
establishment-level production data has been used in various pre-
vious studies (see, for instance, Amiti & Konings, 2007; Blalock &
Gertler, 2004, 2008; Roy & Yasßar, 2015). We, however, manually
collected indexes (in 2000 prices) using an unpublished concor-
dance table from BPS to deflate the value added and inputs. We
deflated the valued added using Indeks Harga Perdagangan Besar
(i.e., the wholesale price indexes (WPIs) at the two-digit level,
which is available in Buletin Statistik Bulanan Indikator Ekonomi,
or the Monthly Statistical Bulletin of Economic Indicators).8
Capital input is measured by using the value of capital goods
(e.g., land, building, machinery and equipment, vehicles, and
others). These values are missing for 2006. Thus, we obtained the
capital input for 2006 using the following interpolation. We first
obtain the deflated capital stock (K) for plant i in year t from
K ðt Þ ¼ ½ðK ðt 1 Þ  K ðt0 ÞÞðt  t0 Þ=t 1  t 0  þ K ðt 0 Þ, where t0 and t1 repre-
sent the period before and after t for which the value is available.
We then obtain the capital input values for 2006. Our capital input
price deflators are obtained from the webpage of the Bank Indone-
sia. The establishment data is a rich unbalanced panel data set from
2001 to 2007 that includes typical balance sheet and income state-
ment information. The data also provides statistics on location
(e.g., province), ownership (e.g., private or state or foreign), wages
and number of workers by gender and skill level, energy usage
(fuels and lubricant usage, purchase and sale of electricity), inter-
national engagement (imported intermediate input share and
export status), and so on.9 Note that we use the employment of pro-
duction and non-production workers to define unskilled and skilled
workers, respectively. This is common in most studies. See, for
instance, the papers by Amiti and Konnings (2007) and Amiti and
Cameron (2012) for Indonesia and Pavcnik (2003) for Chile Table A1.
The full summary statistics for the variables used in the study
are illustrated in Appendix Table 1. We have dropped observations
with missing and negative values. We have also dropped plants for
which data was available only for one year, as we use fixed effect
models. The final unbalanced panel data set used for the analysis
in this article ended up with 56,320 observations for the period
2001–2007 Tables A2 and A3.
Our two main variables of interest are the share of imported
intermediate inputs and the share of foreign equity, which both
range from about 0 to 1. The imported intermediate inputs data is
collected by using the 10-digit Harmonized System (HS) code for
classifying imported inputs. In the survey, the managers are asked
to list the 10-digit HS code for the imported intermediate input.
However, the researchers are only provided with the aggregate
value for each plant. The survey question excludes: 1) wrapping,
packing, and binding of finished goods, 2) fuel used, and 3) furniture
appliances. Most plants are domestically owned (91.5%) and do not
import any intermediate inputs (81%) Tables A4 and A5.10
We also present descriptive statistics by ownership status (for-
eign vs. domestic) and by import status (importer vs. non-
importer) in Appendix Tables 2 and 3.11 Simple mean differences
from these tables indicate that foreign-owned firms and importers
tend to have higher skilled labor shares. Appendix Table 4 presents
the average skilled wages share, FORS, and IMPS by industry. Appen-
dix Table 5 shows the average skilled wage share by industry, import
status, and ownership type. The trends over time of the average
skilled labor wage share (by import status and by foreign ownership)
are presented in Appendix Figs. 1 and 2. These trends suggest a fairly
stable skilled labor share difference over time (i.e., difference
between importer vs. non-importer and difference between foreign
vs. domestic) Table A6, Figs. A1 and A2.
8
We have also used the wholesale price indexes at the five-digit level, which we
obtained using unpublished concordance tables from BPS, to deflate the value added.
The results were similar to these obtained by using the two-digit level deflators. Since
the indexes at the five-digit level are not available for some sub-industries, we ended
up deflating the value added using the wholesale price indexes (WPIs) at the two-
digit level.
9
We updated the province codes using the information at http://www.sta-
toids.com/uid.html.
10
In our analysis, we used both the shares and the dummy variables that represent
imported material and foreign equity. The results are similar.
11
Descriptive statistics on average skilled wage shares by industry are also
presented in Appendix Tables 4 and 5.
 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847
4. Empirical approach
4.1. Deriving the cost share equation specification
In order to examine the impact of international linkages on
skill-upgrading, we consider a translog cost function with two vari-
able inputs (e.g., skilled and unskilled workers), and one quasi-
fixed input (capital). Following standard duality arguments, we
consider a translog form for the short-run variable cost function,12
which does not impose a priori restrictions on the degree of substi-
tution among the inputs.13 Given that variable cost is defined as:
VC ¼ W S LS þ W US LUS ; the second-order, twice differentiable, non-
homothetic, and non-neutral technical change translog variable cost
function in logarithmic terms can be written as,
X
lnVC it ¼ b0 þ bY lnY it þ bj lnW jit þ bK lnK it þ bT T
j typically use the share of computer expenditures in total capital
XX
1
þ 2
þ 1=2 b lnW jit lnW mit
m jm
2bYY ðlnY it Þ j tries likely rely on international linkages that facilitate technology
X
þ 1=2bKK ðlnK it Þ þ
2
bjY lnW jit lnY it þ bYK lnY it lnK it
j own R&D. Thus, in this study T includes variables that represent
X X
þ bjK lnW jit lnK it þ bKT lnK it T þ bjT lnW jit T
j j
 
þ bYT lnY it T þ 1=2 bTT T 2 þ uit ;
where j, m = LS and LUS ;i = 1, 2,. . ., N.; t = 1, 2,. . .,T; lnVC it is the natural
logarithm of the variable cost; lnWi are the natural logarithms of the
variable input prices; lnYit is the natural logarithm of the level of
value added; lnKit is the natural logarithm of the capital input; uit
is the error term; T represents a shift in the production technology
or technical change; and the bs are the parameters to be estimated.
Assuming a competitive input market, and applying Shephard’s
(1953, 1970) lemma, the corresponding cost share equations of the
variable inputs can be obtained as follows:14
W jit X jit W jit X jit @lnVC it
Sjit ¼ P ¼ ¼
j W jit X jit VC it @lnW jit
X
¼ bj þ bjY lnY it þ bjK lnK it þ bjT T it þ b lnW mit
m jm
where X j is the corresponding input and Si are the shares of the vari-
able inputs in total variable cost. Note that the difference between
the share equations from the traditional translog cost function,
which is based on the assumption that all inputs are instanta-
neously adaptable, and the equations here is that here the capital
input emerge as a level instead of as a price of capital.
It is assumed that this cost function is positive, linearly
homogenous and concave in variable input prices, increasing in
variable input prices and output, and decreasing and convex for
the quasi-fixed capital input. Given these assumptions, certain
restrictions are imposed on the estimated parameters, such as
the homogeneity of degree one in input prices (Brown &
Christensen, 1981). For a well-behaved production function, the
cost function must be homogeneous of degree one in input prices.
The linear homogeneity in prices results in the following restric-
12
See Christensen et al. (1973) for a more detailed discussion about the translog
cost function.
13
Note that the difference between the translog short-run cost function and the
traditional translog cost function is that in the former the quasi-fixed input capital is
included as a quantity level, rather than as a price.
14
Applying Shephard’s lemma (1953, 1970), the derivatives of lnVCit, with respect to
@lnVC it
the prices for the variable inputs (@lnW jit
), are equal to the shares of these factors in
W jit X jit
variable cost ( VC it
) at the levels of the variable inputs that minimize the variable
cost.
5
tions: Rjbj = 1; Rjbjm = 0; Rmbmj = 0; RjbjY = 0; RjbjT = 0; and Rj-
bjK = 0. The symmetry restriction also requires that bjm = bmj.15
With all these restrictions, the cost share equation for the
skilled labor input becomes:16
 
Sit ¼ a0 þ a1 lnY it þ a2 lnK it þ a3 ln W SK =W USK þ a4 T it þ v it ð3Þ
it
where i and t denote the firm and year, respectively; Sit is ratio of skilled
wages to the sum of the total wage bill; Yit is value added, which is
obtained by subtracting the value of materials and electricity used and
other expenses (e.g., those pertaining to rental payments, taxes, and
donations) from the value of production; K it is the capital stock; W SK is
the wage rate for the skilled workers; W USK is the wage rate for the
unskilled workers; and T is a proxy for technology or technical change.
For the variable T, studies in an industrialized country context
expenditures, the research and development expenditures, or the
number of patents granted. As discussed earlier, developing coun-
transfer from industrialized nations, rather than investing in their
potential channels of international linkages or technology transfer:
the share of imported intermediate inputs (IMPS), and the share of
foreign equity (FORS).17 Thus, our estimating equation becomes:
ð1Þ  
Sit ¼ b0 þ b1 lnY it þ b2 lnðK=Y Þit þ b3 ln W SK =W USK
it
X
T 1 X
N1
þ b4 IMPSit þ b5 FORSit þ kt YDt þ ai FDi þ uit : ð4Þ
t¼1 i¼1
Year dummies, YD, are included to control unobserved time fixed
effects such as macroeconomic shocks and changes in the institutional
environment. Firm dummies (FD) are included to control for fixed
effects such as managerial quality, work environment or culture.18
15
In order to ensure that the Hessian o2 lnVC/olnWj lnWm is symmetric, the bjm= bmj
restriction is also imposed. For monotonicity, the cost function should be an
increasing function of input prices, i.e., olnVC/olnWj >0 and o2 lnVC/olnWj >0, which
implies that the cost shares should be positive. In order to ensure concavity in input
ð2Þ prices, the Hessian matrix of the second partial derivatives of the variable cost
function, with respect to input prices, should be negative semi-definite. The variable
translog cost function can be simplified further by imposing more restrictions on the
parameters to be estimated. For instance, further restrictions can be imposed
depending on whether the production function is expected to be represented by
short-run constant returns to scale (bY=1; biY=0; bYK=0; and bYT=0) or long-run
constant returns to scale (bY+bK=1; bYY+bYK=0 ; bjY+bjK=0; bYK+bKK=0; and bTY+bTK=0).
The long-run constant returns to scale restrictions infer that the variable cost function
is homogeneous of degree one in output and quasi-fixed input capital. In addition, a
homothetic production function would imply that bjY =0 (See Brown & Christensen,
1981; Christensen & Greene, 1976).
16
We estimate the cost share equation with respect to two types of labor (i.e.,
production and non-production workers as variable inputs).
17
According to Solow (1960), technical change is embodied in new investment
goods. Firms in developing countries transfer embodied technology by importing
intermediate and capital goods or through FDI. Thus, we use two proxies for the
technology transfer through international linkages: (1) FDI share, and (2) the share of
imported material and capital inputs from the total material input. FDI has been
considered to be a strong channel for embodied technology transfer as multinational
firms transfer machinery, equipment, and intermediate inputs to their affiliates. Firms
without FDI transfer technologies by importing intermediate and capital inputs,
which embodies the technology.
18
Given that the wage rates in the share equation are endogenous, one typically
follows Machin and Van Reenen (1998) and replaces the wage ratio with industry-by-
time dummies. These dummy variables control for unobservable factors that are
likely to change across industries and time, such as input prices and tariffs. In
addition, province-by-time and time dummy variables can also be used to control for
time-varying region-specific unobservable factors. Including industry-by-year and
region-by-year dummy variables would absorb business cycle shocks which affect
contemporaneously the skilled share and the covariates, which can potentially bias
results if not accounted for. We followed these strategies in our initial Ordinary Least
Squares (OLS) runs and the results are similar to those reported in this article using
other estimation approaches. Note that we cannot include industry and region
dummies in any of our ‘‘fixed effects” type estimation strategies (see discussion
below) because they are time-invariant (and are absorbed in the firm fixed effects).
6 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847
We tested for multicollinearity of the independent variables in
equation (6) to make sure that we have proper inferences from the
empirical specification. Variance Inflation Factors (VIFs) are given
in Appendix Table 6. The ‘‘rule of thumb” in the literature is that
a VIF > 10 or a tolerance level < 0.1 is a sign of a serious multi-
collinearity problem. None of the variables used for the analysis
had VIFs greater than 10 or tolerance levels less than 0.1, indicating
that multicollinearity is not a threat.
4.2. Estimation strategy: correlated random effects (CRE) probit
Our main estimation strategy is based on a fractional response
model in an unbalanced panel data context. Given the panel nature
of our data, we first consider traditional panel data estimation
methods that would allow for unobserved heterogeneity and iden-
tify the effects of international linkages on skilled labor share.
We begin with a traditional panel data random effects (RE) esti-
mator that produces consistent and efficient estimates only if the
explanatory variables are not correlated with unobserved time-
invariant variables (e.g., endogeneity due to unobserved hetero-
geneity). This may not be a valid assumption in our case, as the
unobserved time-invariant factors, such as time-invariant manage-
rial quality, are likely to be correlated with the observed time-
variant explanatory variables in the model. This assumption is
relaxed in the traditional panel fixed effects (FE) approach, which
we also use in this study. This FE approach suffers from the so-
called ‘‘incidental parameters” problem in estimating nonlinear
models, however (i.e., given the fractional (between zero and
one) nature of our dependent variable (see the share equation in
(4))). In addition, the traditional RE and FE estimators also do not
directly account for the fractional nature of the outcome variable
(e.g., predictions maybe outside the range of zero and one).
Notwithstanding the shortcomings of these two traditional panel
data methods, we still utilize the RE and FE methods in this article
as the basis of comparison for the other estimation procedures (see
below).
In light of these limitations we primarily utilize the Correlated
Random Effects (CRE) Probit approach for estimating fractional
response models with unbalanced panel data (see Wooldridge,
2016). Consider the following ‘‘more compact” representation of
the share equation:
EðSit jX it ; ai Þ ¼ GðX it b þ ai Þ;
where the X vector includes the explanatory variables discussed in
the previous section, including the year dummies; ai represents the
plant-specific, unobserved, time-invariant characteristics that can
affect the skill-upgrading (and/or the other elements of X); G is a
nonlinear link function taking on values strictly between zero and
one, for which the standard normal cumulative distribution func-
tion (Probit link function) is considered.
Papke and Wooldridge (1996) first introduced a quasi-
maximum likelihood estimator (QMLE) that is appropriate for the
fractional model in (5), but only when using cross-sectional data.
This approach is robust to heteroscedasticity, ensures that the pre-
dicted values of the outcome fall in the zero to one interval, allows
for nonlinear effects, and provides consistent estimates of partial/-
marginal effects.19 Papke and Wooldridge (2008) and Wooldridge
(2016) then extended the QMLE method to panel data by introducing
the CRE Probit methods for balanced and unbalanced data, respec-
tively. Given that our data is an unbalanced panel, the pertinent esti-
mator in our case is the estimator from Wooldridge (2016).
Similar to the traditional panel FE model, the CRE Probit
approach for unbalanced panel data controls for endogeneity due
19
See Ramalho et al. (2011) for a review.
to unobserved time-invariant factors (i.e., the potential correlation
between unobserved firm heterogeneity and observed time-
varying covariates in the model (Wooldridge, 2016)).20 The CRE
Probit approach builds on the well-known Mundlak-Chamberlain
approach and models firm fixed effects as a linear function of the
firm-level averages of the covariates (Papke & Wooldridge, 2008;
Wooldridge, 2016).
For linear models, Mundlak (1978) showed that the traditional
fixed effects model is equivalent to the OLS model that includes the
averages of the time-varying covariates in addition to the observed
covariates themselves. In other words, the CRE Probit model and
the traditional fixed effects model produce identical estimates in
the linear panel data context, but produce different results in non-
linear panel data specifications. However, the marginal effects and
the standard errors obtained in the CRE Probit approach are more
reliable for nonlinear models like the one in this study (more on
this below). Papke and Wooldridge (2008) control for the potential
correlation between the unobserved factors and time-varying
covariates in fractional response models with balanced panel data
by including the covariates’ firm-specific means over time. Fur-
thermore, Wooldridge (2016) builds on the work of Papke and
Wooldridge (2008) by estimating fractional response models for
unbalanced panel data by not only including the time averages of
the covariates, but also including variables that represent the num-
ber of years each firm is in the sample.
More specifically, suppose that we have four time-varying
covariates: x1; x2; x3; and x4: Further, suppose that the mean of these
covariates over time for each firm are: x1 ; x2 ; x3 ; and x4 : In a CRE
Probit framework, we can then run yit on x1; x2; x3; x4: x1 ; x2 ; x3 ; x4 ,
year dummies, firm averages of year dummies, industry and region
dummies, and proxy variables that represent the total number of
years that each firm has data for in the sample. In this case, the
P
term ai ¼ ðd1 x1 þ d2 x2 þ d3 x3 þ d4 x4 Þ in the CRE Probit approach
developed by Papke and Wooldridge (2008) allows for the poten-
tial correlation between unobserved firm heterogeneity and the
time-varying covariates. The inclusion of the firm-specific time
averages controls for these potential correlations in the case of a
balanced panel. For an unbalanced panel, variables that represent
the number of years each firm is present in the sample also needs
to be included in order to control for the unobserved firm hetero-
geneity (Wooldridge, 2016). In the present study, we follow the
general specification described above for the CRE Probit approach
ð5Þ in order to address endogeneity problems associated with the
unobserved heterogeneity issue (e.g., our nonlinear CRE Probit
models include the covariates and their averages, time fixed
effects, averages of time fixed effects, industry and region fixed
effects, and variables that identify the number of total years each
firm is represented in the sample).21
Another advantage of using the CRE Probit in our context is that it
allows us to obtain appropriate and more accurate marginal effects,
as well as their corresponding standard errors. As highlighted in
Wooldridge (2016), when T is small and n is large (as in our case),
the traditional fixed effects estimators does not allow us to predict
the appropriate average/marginal effects, as the conditional mean of
the heterogeneity is not taken into consideration. Both traditional
fixed effects and random effects models require shocks to be inde-
pendent over time. This assumption is not required with the CRE
model. The CRE approach identifies the marginal effects by allowing
for the serial dependence in the data over time, as long as the num-
20
Even if the CRE Probit has a ‘‘random effects” name attached to it (i.e., correlated
‘‘random effects”), it is unlike the traditional panel data ‘‘random effects” model
because the CRE Probit approach can address endogeneity due to unobserved
heterogeneity.
21
In light of this specification that includes averages for each firm, we only keep
plants that have two or more observations in our analysis.
 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847
ber of cross-sectional observations is large enough (i.e., we have a
large number of cross sectional observations).
In summary, the CRE Probit approach used in this article allows
us to address the unobserved heterogeneity problem and does not
require the shocks to be independent overtime, which then allows
us to causally identify the parameters associated with our indepen-
dent variables of interest (e.g., importing of intermediate inputs
and foreign direct investments).
4.3. Robustness check: instrumental variable (IV) based on higher
moments of data
Notwithstanding the desirable features of the CRE Probit
approach in our empirical context, it may still be possible that
there is residual endogeneity due to unobserved time-varying
(rather than time-invariant) shocks that can affect both the
demand for skilled labor and the international involvement of
firms. Although we believe that the main source of endogeneity
in our context is unobserved heterogeneity (which we address
through the use of the CRE Probit model), we also used a recently
developed moment-based instrumental variable (IV) approach (see
Lewbel, 2012) to address the possible endogeneity due to a corre-
lation between time-varying unobservables and the observed
covariates, which further allows us to identify the causal effects
of the international linkage variables on skilled labor demand in
the presence of this type of endogeneity. The moment-based IV
estimator utilizes heteroscedasticity for the error terms from the
first-stage regression (e.g., regression of the international linkages
variables to observable covariates) to identify the coefficients of
the endogenous variables even in the absence of exclusion restric-
tions or valid instruments.
In order to implement the Lewbel (2012) technique, we have
specified two auxiliary or first-stage equations: one for FDI and
one for importing. According to Lewbel (2012), our model is iden-
tified if the error terms in the first-stage FDI and importing equa-
tions are heteroscedastic. That is, some of the control variables in
the first stage are correlated with the variance of the first-stage
error terms, but not with the covariance between the error terms
of these two equations and the error term in the second-stage out-
come equation (equation (4) in the manuscript). Then, the residu-
als from the first-stage FDI and importing equations multiplied by
each of the exogenous covariates in mean-centered form can serve
as valid instruments. We used the Breusch and Pagan (1979) test to
validate the presence of the heteroscedasticity condition required
for the error terms in the first-stage regressions. Note that the first
stage regressions included the natural log of valued added and the
capital – valued added intensity as covariates. As illustrated in
Table 2, the Sargan or Hansen J test of overidentifying restrictions
to test for correlation between instruments and error terms vali-
date the use of these instruments (i.e., the P-Value is greater than
0.10, which means we fail to reject the presence of exogeneity).
The results are illustrated in the first column of Table 2.
In summary, the CRE Probit approach allows us to causally iden-
tify effects of international linkages on skilled labor demand if the
main source of endogeneity is due to unobserved heterogeneity
(e.g., time-invariant unobservables correlated with observed
covariates). Furthermore, the moment-based IV procedure we use
as a robustness check allows us to address endogeneity due to
the possible correlation between time-varying unobservables and
observed covariates.
4.4. Robustness check: quantile FE regression
In addition to the estimation procedures described in the previ-
ous two sub-sections, we also utilized a quantile FE regression
approach as a robustness check. Note that the traditional panel
7
data estimators and the CRE Probit estimator only allow us to
examine the impact of international linkage variables on the
expected (mean) value of the relative demand for skilled labor.
However, there could be substantial heterogeneity in the condi-
tional distribution of the skilled labor share, and it would also be
useful to analyze the impact of international linkages at different
points of the conditional skilled labor share distribution (aside
from the mean). For example, it would be interesting to see if the
effect of imports and FDI is higher for those plants at the higher
end of the conditional skilled labor share distribution vis-à-vis
those plants at the lower end. Moreover, results from the quantile
FE regression at the median of the conditional outcome distribu-
tion can also serve as a useful robustness check relative to the esti-
mated ‘‘mean” effects from the RE, FE, and CRE Probit estimators.
In particular, we use the two-step quantile FE approach devel-
oped by Canay (2011) where the unobserved fixed effects are elim-
inated using a data transformation approach that treats them as
location shifters. To illustrate this approach, consider another com-
pact notation for equation (4) prior to the first-differencing
transformation:
Sit ¼ X it bðsÞ þ gi þ lit ðsÞ ð6Þ
where Sit is the skilled wage share as described in equation (4), X it is a
vector that includes the explanatory variables discussed in equation
(4), bðsÞ is a vector of parameters to be estimated at particular quan-
tile s, gi is the unobserved fixed-effect for cross-sectional unit i, and
lit ðsÞ is the idiosyncratic, time-varying error term at a particular
quantile s. Given the notation in (6), the first step in the Canay
pffiffiffi
(2011) approach is computing a T -consistent estimator of gi using
pffiffiffiffiffiffi
a nT -consistent estimator of b derived from an Ordinary Least
Squares (OLS) regression of the first-differences (i.e., a regression of
DSit on DX it ). The second step then uses gb to calculate b
i
b
S it  Sit  git
and run a quantile regression of bS it on X it to estimate the parameters
at different quantiles bðsÞ. For proper inference, bootstrapped stan-
dard errors (using 500 replications) are calculated in the second stage.
Using the quantile FE regression approach above allows us to
control for the endogeneity associated with unobservables that
are time invariant (as in the traditional fixed-effects or first-
differencing transformation), and at the same time allows us to
examine the effect of international linkages at different points in
the conditional outcome distribution. Thus, we would have infor-
mation on whether the impact of international linkages varies
depending on where the firm is in terms of the conditional out-
come distribution. Another advantage of the quantile FE regression
is that estimates are robust to outliers in the outcome variable.
5. Results
In Table 1, we first show results from the traditional panel RE
and FE estimation approaches (see columns 1 and 2). As noted
above, these estimation procedures may not provide valid esti-
mates given the underlying assumptions in each approach (i.e.,
correlation between the explanatory variables and unobserved
heterogeneity for RE, and the incidental parameters problem for
FE). Nonetheless, results from these initial RE and FE runs suggest
that the importing intensity (as proxied through the IMPS variable)
and FDI (as proxied through the FORS variable) have a strong statis-
tically significant positive effect on the share of skilled wages to
the sum of the total wage bill (Sit).
Given the limitations of the RE and FE models, we estimated the
share equation in (4) using the CRE Probit procedure described in
the previous section and present the estimated marginal effects
in the third column of Table 1. The results from the CRE Probit is
consistent with the RE and FE estimates, where the marginal
effects associated with the IMPS and FORS variables reveal a strong
8 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847

Table 1 ate import shares or foreign equity shares has a statistically signifi-
Results from the Random Effects (RE), Fixed Effects (FE), and Correlated Random cant positive effect on skilled labor wage share is important in and of
Effects (CRE) Probit Estimation Approaches.
itself given that standard trade theories predict the opposite (e.g.,
(1) (2) (3) international linkages increase unskilled labor wages in developing
Variables RE FE CRE Probit: ME countries and narrows he skilled-unskilled labor wage gap). In addi-
ln Y 0.016*** 0.006*** 0.005*** tion, relative to the standard deviation of the skilled labor share vari-
(0.001) (0.001) (0.001) able (which is 0.178 in Appendix Table 1), the magnitude of the
ln (K/Y) 0.013*** 0.008*** 0.007***
(0.001) (0.001) (0.001)
international linkage effect can arguably still be considered as non-
FORS 0.040*** 0.033*** 0.025*** trivial.
(0.005) (0.008) (0.007) As highlighted earlier, Lee and Wie (2015) use five-digit
IMPS 0.048*** 0.036*** 0.030*** industry-level data (not plant-level data) to examine the impact
(0.006) (0.008) (0.007)
of international linkages on the share of skilled labor in total wage
Constant 0.005 0.144*** –
(0.009) (0.016) – bill. As illustrated in Table 8 in their study, the magnitude of the
import share effect is similar to ours (e.g., around 0.03). The coef-
Total No. of Obs. 56,320 56,320 56,320
Number of Plants 18,559 18,559 18,559 ficient on the foreign equity share, however, is a little different,
as they include the foreign equity share and import share variables
Notes:
separately in their regressions, not simultaneously. Apart from
(1) Robust standard errors in parentheses; ***p < 0.01, **p < 0.05, *p < 0.1.
(2) RE = random effects, FE = fixed effects, CRE = Correlated Random Effects,
using industry-level data, including these two variables separately
ME = Marginal Effects could lead to omitted variable bias. They also use pooled OLS with
(3) Y = value added, K = capital stock, FORS = share of foreign equity (representing year fixed effects, which is different from our approach. Amiti and
FDI), IMPS = share of imported intermediate inputs. Cameron (2012) use the natural log of the firm-level ratio of the
(4) Year Dummies (YD) are included in all estimation runs (1–3) above. However,
non-production wages to production wages and they also interact
for brevity, the parameter estimates for YD are not reported here, but are available
from the authors upon request. the import share with the five-digit industry-level tariffs. Thus, it is
(5) The results reported in column (3) are the estimated marginal effects (ME) from difficult for us to compare the magnitude of our results with theirs.
the CRE Probit model, which would allow for valid comparisons with the RE and FE As we discuss below, they also predict and confirm that the trade
estimates in columns (1) and (2). The actual coefficient estimates (e.g., not marginal
liberalization lowers the skilled wage premium. Their findings
effects) from the CRE Probit Model are available from the authors upon request.
are the inverse of what we find, and what Lee & Wei find using
industry-level data.23
statistically significant positive sign. This is evidence that interna- Amiti and Cameron (2012) examine the effect of tariff changes
tional linkages through importing intensity and FDIs likely increase or trade liberalization on the wages of production workers relative
relative skilled labor demand (e.g., skill-upgrading) in Indonesia. It to non-production workers.24 Their results show that the decrease
is also important to note that the magnitudes of the estimated in input tariffs leads to lower wages for non-production workers rel-
marginal effects for IMPS and FORS in column (3) are slightly lower ative to those of production workers for the firms that import their
than the magnitudes for the RE and FE estimates in columns (1) intermediate inputs. They interact the import variable with
and (2). This suggests that the RE and FE estimates may be biased industry-level input and output tariff variables and show that at
upwards. the mean of the imported intermediate input share (0.25), a one per-
In terms of magnitudes, the CRE Probit results indicate that a centage point fall in input tariffs decreases the skill premium (the
ten percentage point increase in the import share of intermediate natural log WS/WUS) by 0.45 percentage points. The impact of the
inputs leads to a 0.3 percentage point increase in relative skilled cut in the output tariff, however, is not significant. Amiti and
labor wage share. Similarly, a ten percentage point increase in for- Cameron (2012) offer the following intuition for these findings.
eign equity share leads to a 0.255 percentage point increase in the Importing firms may stop producing skill-intensive inputs ‘‘in-
share of skilled labor wage (vis-à-vis the total wage bill). We can house” and begin importing these inputs (international outsource)
provide further information on the magnitude of the variables by after the tariffs are cut. They may instead become more vertically
using the summary statistics illustrated in Appendix Table 2 and integrated in terms of the production of less-skill intensive produc-
Appendix Table 3. As illustrated in Appendix Table 2, the average tion stages. This will lead to less demand for skilled workers and
value of import share for the foreign-owned firms and domestic higher demand for unskilled workers, and thus a lower skilled wage
firms is 39.3% and 6.2%, respectively, resulting in a difference of premium. They also predict that the cut in input tariffs will result in
33.1%. This indicates that if the domestically owned firms had higher efficiency and profit for the importers, which will then yield
the average import share of the foreign-owned firms, the share of higher demand for both skilled and unskilled workers.
the skilled labor in total wages would increase by 0.9 percentage The theoretical papers we reviewed in the conceptual frame-
points. Similarly, as illustrated in Appendix Table 3, the foreign work section, however, predict the opposite.25 More trade liberal-
equity share for the importers and non-importers is 24.5% and ization or a cut in input tariffs is likely to increase the skill
2.9%, respectively. Thus, if the non-importers had the foreign premium as the intermediate or capital inputs would complement
equity share of the importing firms, the share of the skilled labor skilled labor, create higher demand for skilled workers, and substi-
in total wages would increase by 0.54 percentage points. tute them for unskilled labor. The wage gap is likely to increase since
Note that the magnitude of the estimated IMPS and FORS effects firms transfer and adapt skill-complementary technologies devel-
does not seem to be particularly ‘‘large” given the less than one oped in the industrialized nations. The results from Amiti and
percentage point increase of the skill labor wage share in the sce- Cameron (2012) are consistent with the standard trade theory pre-
narios described above. This suggests that increasing the share of
imported intermediate inputs or the share of foreign equity may
not lead to substantially large increases in the skilled labor wage 23
We included an export dummy in our models, but its coefficient was insignificant
share.22 Nevertheless, the ‘‘directional” result that larger intermedi- and dropping it from the model does not affect the parameter estimates of the other
variables. In other words, it does not lead to omitted variable bias.
24
Another study on Indonesia is from Kasahara et al. (2016), who examine the
22
As noted by a reviewer, given the estimated magnitude of the international impact on the skilled labor demand, not on the wages of the skilled labor. They used
linkage effect, it is possible that substantial technology transfers may not lead to a data for two years: 1996 and 2006.
25
proportionally large increase in skilled labor wages. See Goldberg and Pavcnik (2007) for an excellent review.
 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847 9

Table 2
Robustness Checks: Results from the Moment-based IV Method and the Fixed Effects Quantile Regression (at various quantiles).

(1) (2) (3) (4) (5) (6)

Variables Moment-based IV Quantile Regression Estimates (by different quantiles)
0.1 0.25 0.5 0.75 0.90
ln Y 0.00591*** 0.002*** 0.004*** 0.006*** 0.009*** 0.013***
(0.01255) (0.001) (0.001) (0.001) (0.001) (0.001)
ln (K/Y) 0.00728*** 0.003*** 0.004*** 0.008*** 0.010*** 0.014***
(0.00098) (0.001) (0.001) (0.001) (0.001) (0.001)
FORS 0.06371*** 0.025*** 0.026*** 0.033*** 0.031*** 0.057***
(0.01718) (0.008) (0.007) (0.007) (0.008) (0.010)
IMPS 0.03086** 0.033*** 0.042*** 0.036*** 0.035*** 0.040***
(0.01433) (0.009) (0.007) (0.008) (0.008) (0.011)
Constant – 0.106*** 0.148*** 0.144*** 0.128*** 0.219***
– (0.017) (0.015) (0.014) (0.014) (0.015)
Sargan/Hansen J P-Value 0.5516 – – – – –
Cragg-Donald Wald F statistic 386.183 – – – – –
Total No. of Obs. 56,320 56,320 56,320 56,320 56,320 56,320
Number of Plants 18,559 18,559 18,559 18,559 18,559 18,559

Notes:
(1) Robust standard errors in parentheses; ***p < 0.01, **p < 0.05, *p < 0.1.
(2) Columns (2) to (6) represents the relevant percentiles (and/or quantiles) of the outcome variable for which the quantile regression pertains.
(3) Y = value added, K = capital stock, FORS = share of foreign equity (representing FDI), IMPS = share of imported intermediate inputs.
(4) Year Dummies (YD) are included in all estimation runs (columns 1–6) above. However, for brevity, the parameter estimates for YD are not reported here, but are available
from the authors upon request.

dictions. On the contrary, we find that liberalization (more import of
intermediate inputs and FDI) can lead to increased demand for
skilled labor and a widening of the skilled-unskilled labor wage
gap in Indonesia. Our findings support the theoretical explanation
provided by Acemoglu (2003), where he concludes that trade leads
to higher skilled wage premiums in both countries with abundant
skilled labor and countries with scarce skilled labor. Our empirical
results and Acemoglu (2003) explanation support the notion that
skill-biased technological changes in a developing country like
Indonesia are mainly drawn from advances in industrialized nations,
and the transfer of these technological innovations to developing
nations are facilitated by international linkages—particularly,
through importing and/or FDI. In fact, the studies in other countries
document that trade liberalization resulted in higher demand for
skilled labor, and thus higher skill premiums or wage inequality in
various developing countries. For instance, these findings are docu-
mented by Harrison and Hanson (1999) for Mexico and Chile,
Gindling and Robbins (2001) for Chile and Costa Rica, Attanasio,
Goldberg, and Pavcnik (2004) for Colombia, and Demir (2010),
Meschi, Taymaz, and Vivarell (2011), and Turco and Maggioni
(2013) for Turkey. Our study complements these studies.
The robustness check results using the moment-based IV and
quantile FE regression results are presented in Table 2. The
moment-based IV results (see column 1) still suggests that the
international linkage variables have a statistically significant posi-
tive effect on skilled labor demand. In addition, the magnitude of
the parameter estimate for IMPS is in line with previous estimates
from the CRE Probit estimator. However, the magnitude of the
FORS parameter estimate from the moment-based IV estimator
tend to be somewhat higher than the one estimated by the CRE
PRobit model. Nonetheless, these moment-based IV results gener-
ally support the notion that the main source of endogeneity in our
specification may be due to the correlation of unobserved time-
invariant variables and the observed covariates, which is con-
trolled for in the FE and CRE probit regressions. Controlling for
endogeneity due to the correlation of unobservable time-varying
factors and the observed covariates (i.e., through the moment-
based IV) generate results that does not substantially differ from
the main inferences based on the FE and CRE Probit results (with
the exception of the larger magnitude of the FORS variable).
The robustness check results from the quantile FE procedure
are reported in columns (2) to (6) of Table 2 (e.g., for the following
quantiles: 0.1, 0.25, 0.5, 0.75, and 0.90). Recall that the quantile FE
regression was conducted to examine whether the effects of the
international linkage variables varies depending on the location
of the plant in the conditional skilled wage share distribution.
We find that the effects of international linkages on the skilled
labor wage share are larger for firms at the higher end of the con-
ditional outcome distribution (at the 0.90 quantile). However, the
effects at the lower quantiles (e.g., 0.75, median, and quantiles
below the median) tend to have effect magnitudes that are quite
similar to the estimated ‘‘mean” effects from the RE, FE, CRE Pro-
bit, and moment-based IV regressions. Hence, the ‘‘median”
regression results (0.5 quantile) is generally consistent with the
‘‘mean” effects from the other estimations (with the exception of
the FORS variable in the moment-based IV). The main inference
that increased international linkages (through the importing of
intermediate materials and FDI) leads to higher skilled labor
demand is robust across all estimation procedures used in the
study.
Overall, our findings show that international linkages, specifi-
cally through importing and FDIs, play an important role in the
skill-upgrading behavior of firms in Indonesia. These international
linkages tend to increase skill-upgrading and, consequently, have
the potential to increase the skilled-unskilled labor wage gap.
Although the magnitude of the estimated international linkage
effects is not particularly ‘‘large”, we believe that it is still non-
trivial, and the statistically significant positive relationship
between international linkages and skilled labor wage share is
important because it is in contrast to what is predicted by standard
trade theory, where the wage gap between skilled and unskilled
labor is predicted to decrease as a developing country participates
more in international trade.
It is likely that skill-biased technological change is facilitated
by firms’ international linkages (i.e., more importing of intermedi-
ate goods and FDIs), such that positive skill-upgrading is revealed
in the analysis. This suggests that foreign technology transfer
through imports and FDI may be a more important source of
skill-upgrading in developing countries (as compared to in-
country R&D efforts in industrialized nations). Since firms in
10 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847
developing countries (like Indonesia) barely conduct their own
R&D, it is likely that technology transfer through importing con-
tacts and through multinational companies (i.e., where they invest
in local subsidiaries) are the main factors affecting skill-
upgrading.26 The imitation of technologies from industrialized
nations may also be enhanced through these types of international
linkages.
6. Conclusions
Various studies have explored the relationship between capital
deepening and skilled labor demand (i.e., the capital-skill comple-
mentarity concept), but the majority of these studies are in the
context of industrialized countries. The main insight from these
studies is that skill-biased technological change is the main
determinant of the positive relationship between capital and
skilled-labor demand in these nations. Moreover, the skill-biased
technological change in industrialized nations is typically associ-
ated with in-country R&D efforts.
However, in developing countries like Indonesia, there are few
in-country R&D efforts that can facilitate skill-biased technological
change, and yet there are empirical studies in developing coun-
tries that still suggest an increase in the demand for skilled labor
(as well as a potential widening of the skilled-unskilled labor wage
gap) as capital grows. Note, however, that previous empirical stud-
ies in developing countries have shown mixed results in terms of
the effect of international linkages on skilled labor demand,
depending on the country and the time period considered (i.e.,
some show no statistically significant effect, some show a statisti-
cally negative effect, and some show a significantly positive
effect). In this study, we posit that international linkages, through
imports and FDIs, are the main determinants of this skill-biased
technological change in Indonesia, and these international link-
ages in turn lead to more skill-upgrading (i.e., a higher demand
for skilled labor). Note that this explanation contradicts the stan-
dard trade theory prediction that trade openness would result in
increased unskilled labor demand and a potential narrowing of
the skilled-unskilled labor wage gap (i.e., see footnote 6 in this
paper). Therefore, it is important to empirically test whether inter-
national linkages do lead to increased skill-upgrading in a devel-
oping country like Indonesia. This is the main goal of the
present study.
Using plant-level data from Indonesia (and a number of estima-
tion procedures), we find empirical support for our hypothesis
that international linkages do indeed have a statistically signifi-
cant positive effect on the skill-upgrading of firms (although the
magnitude of the effect is not substantially large). Acemoglu
(2003) provides a theoretical explanation for this result, where
he concluded that trade ‘‘induces skill-biased technical change, cre-
ating a powerful force towards higher skill premia in both skill-
abundant and skill-scarce countries.” Since the firms in Indonesia
mainly rely on the technologies developed in advanced nations,
trade is expected to increase rather than decrease skilled labor
demand and this can potentially widen the skilled-unskilled labor
wage gap. Our empirical results and the explanation from
Acemoglu (2003) support the notion that skill-biased technologi-
cal changes in a developing country like Indonesia are mainly dri-
ven by advances in industrialized nations, and the transfer of these
technological innovations to developing nations is facilitated by
26
Note that this observation is consistent with the studies of Basant and Fikkert
(1996) and Sharma (2016). Basant and Fikkert (1996) found that the productivity
impact of foreign technology purchases is much greater than that of firms’ own in-
house R&D. In a recent study, Sharma (2016) finds similar results for the Indian firms.
That is, the productive impact of foreign technology transfer is stronger than that of
in-house R&D.
international linkages—particularly, through importing and/or
FDI.27 Our study also complements Pavcnik (2003), who highlighted
FDI as an important source of increased demand for skilled labor in
Chile.
Studying the determinants of the increasing skilled labor
demand in Indonesia and its implications on the wage gap between
skilled and unskilled workers is of interest not only to the aca-
demic community but also to policy makers. The wage gap is typ-
ically attributed to skill-biased technological change, trade, foreign
direct investment, and the migration of unskilled workers. In this
study, we show that the increase in skilled labor demand and the
potential widening of the wage gap of skilled relative to unskilled
workers in Indonesia can potentially be linked with the import of
capital inputs and foreign direct investment.28 The technology
transfers through these channels would not only increase the
demand for skilled labor but also enhance their productivity more
than that of unskilled labor. This, in turn, can potentially lead to a
larger wage gap between the two groups.
The firms in developing countries will continue to adopt new
technologies and demand more skilled workers to stay competi-
tive in the global marketplace. Technological change or innovation
is viewed by these countries as the main source of productivity
growth by endogenous growth theory (Romer, 1990; Lucas,
1988). The sources of innovation are investments in research
and development and technology transfer through international
linkages from other nations. Note, however, that firms in Indone-
sia mainly rely on the technology and knowledge produced by
advanced nations rather than investments in in-house research
and development. Policy makers in Indonesia should focus on
matching the increase in demand for skilled workers (which is
associated with technology transfers) with an equivalent increase
in the supply of skilled workers, given that transfers, the adoption
of better technologies, and the hiring of more skilled workers are
all essential to stay competitive in an increasingly global economic
environment. Increases in skilled labor or human capital would
not only lead to more technology transfer and adoptions, but also
result in investments in in-house research and development, and
thus more innovation the long run. Hence, one way to potentially
narrow the skilled-unskilled labor wage gap is not to pursue poli-
cies that will lead to less technology transfers, but rather to focus
on policy interventions that can help match the increase in
demand for skilled workers that stems from these transfers with
an increase in the supply of skilled workers (i.e., through educa-
tional interventions that increase worker skills).
Declaration of Competing Interest
The authors declare that they have no known competing finan-
cial interests or personal relationships that could have appeared
to influence the work reported in this paper.
27
Intermediate material and/or capital imports (see Grossman & Helpman, 1991;
Coe & Helpman, 1995; Eaton & Kortum, 1996; Xu & Wang, 1999; Eaton & Kortum,
2001; and Keller, 2002a, 2002b; Yasar & Morrison Paul, 2007; Yasar, 2013) as well as
FDIs (see Blomstrom & Kokko, 1998, Saggi, 1999; Carr et al., 2001; Yasar & Morrison
Paul, 2007) have been recognized as the two main channels for firms in developing
countries to transfer technologies from the advanced nations.
28
As noted in the previous section, although we find a statistically significant
positive relationship between international linkages and skilled labor wage share, we
consider the magnitude of the estimated effect as not necessarily ‘‘large” but we still
consider the effect magnitude to be ‘‘non-trivial.” Hence, as pointed out by one
reviewer, it is possible that the consequent wage gap impact may not be ‘‘as large” to
be of concern to policy makers. However, we argue that this issue is still of concern to
Indonesian policy makers given the interest in sustaining economic growth through
trade expansion and having a more equitable wage distribution in the long-term.
 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847 11

Acknowledgements Table A1
Descriptive Statistics for the Full Sample [N = 56,320].

We are indebted to the editor and two anonymous referees for Variables Mean Standard
their valuable suggestions and comments. We also wish to Deviation
acknowledge helpful comments by Benjamin Liebman, Luis Orea, Natural Log of Value Added 13.50 1.972
Lourenco Paz, and participants at the European Workshop on Effi- Natural Log of Capital Stock 13.55 2.029
ciency and Productivity Analysis, Southern Economic Association Share of Foreign Equity 0.0698 0.240
Share of Imported Intermediate Inputs 0.0904 0.240
Conference, Florida International University, and the Oklahoma
Foreign Equity Dummy 0.085 0.279
State University. Import Dummy 0.190 0.393
Share of Skilled Labor in Plant Employment 0.176 0.146
Share of Skilled Labor in Plant Wage Bill 0.236 0.178
Natural Log of Capital Stock / Value Added 0.0456 1.624
Skill Premium (The ratio of Skilled Wage to 2.590 26.54
Unskilled Wage per Worker)
Appendix

Fig. A1.

Fig. A2.
12 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847

Table A2
Descriptive Statistics by Ownership Type [N = 56,320].

Variables Domestic Firms Foreign Firms Mean Difference

[1] [2] [2]-[1]
Natural Log of Value Added 13.285 15.820 2.535***
(1.827) (1.973)
Natural Log of Capital Stock 13.348 15.672 2.324***
(1.898) (2.162)
Share of Foreign Equity – – –
– –
Share of Imported Intermediate Inputs 0.062 0.393 0.331***
(0.198) (0.391)
Foreign Equity Dummy – – –
– –
Import Dummy 0.146 0.664 0.518***
(0.353) (0.472)
Share of Skilled Labor in Plant Employment 0.172 0.213 0.041***
(0.143) (0.171)
Share of Skilled Labor in Plant Wage Bill 0.227 0.340 0.113***
(0.171) (0.214)
Natural Log of Capital Stock / Value Added 0.064 0.148 0.212***
(1.587) (1.964)
Skill Premium (The ratio of Skilled Wage to Unskilled Wage per Worker) 2.430 4.310 1.880***
(26.966) (21.298)

Notes:
(1) Value in Parentheses are Standard Deviations (SDs).
(2) ***, **, **—statistically significant difference at the 1%, 5%, and 10% levels.

Table A3
Descriptive Statistics by Import Status [N = 56,320]

Variables Non-Importer Importer Mean Difference

[1] [2] [2]-[1]
Natural Log of Value Added 13.102 15.198 2.096***
(1.703) (2.126)
Natural Log of Capital Stock 13.168 15.154 1.986***
(1.780) (2.225)
Share of Foreign Equity 0.029 0.245 0.216***
(0.158) (0.398)
Share of Imported Intermediate Inputs – – –
– –
Foreign Equity Dummy 0.035 0.297 0.262***
(0.185) (0.457)
Import Dummy – – –
– –
Share of Skilled Labor in Plant Employment 0.168 0.209 0.041***
(0.141) (0.163)
Share of Skilled Labor in Plant Wage Bill 0.220 0.308 0.088***
(0.168) (0.200)
Natural Log of Capital Stock / Value Added 0.067 0.044 0.023***
(1.567) (1.841)
Skill Premium (The ratio of Skilled Wage to Unskilled Wage per Worker) 2.314 3.768 1.454***
(24.056) (35.167)

Notes:
(1) Value in parentheses are Standard Deviations (SDs).
(2) ***, **, **—statistically significant difference at the 1%, 5%, and 10% levels.
 M. Yasar, R.M. Rejesus / World Development 128 (2020) 104847 13

Table A4
Average Skilled Wage Share, FORS, and IMPS by Industry.

Skilled Wage Share FORS IMPS

Food products, beverages, and tobacco 0.231 0.026 0.03
Textiles, textile products, leather, and footwear 0.193 0.076 0.111
Wood and products of wood and cork 0.214 0.052 0.016
Pulp, paper, paper products, printing, and publishing 0.292 0.031 0.063
Coke, refined petroleum products, and nuclear fuel 0.311 0.106 0.069
Chemicals excluding pharmaceuticals 0.386 0.157 0.263
Pharmaceuticals 0.444 0.112 0.384
Rubber & plastics products 0.241 0.07 0.121
Other non-metallic mineral products 0.207 0.028 0.068
Iron & steel 0.326 0.185 0.236
Non-ferrous metals 0.297 0.225 0.262
Fabricated metal products, except machinery & equipment 0.26 0.111 0.153
Machinery & equipment 0.311 0.225 0.242
Electrical machinery & apparatuses 0.316 0.272 0.287
Radio, television, & communication equipment 0.265 0.521 0.498
Medical, precision, & optical instruments 0.265 0.143 0.252
Motor vehicles, trailers, & semi-trailers 0.302 0.191 0.232
Building & repairing of ships & boats 0.225 0.038 0.053
Railroad equipment & transport equip 0.26 0.149 0.181
Manufacturing; recycling 0.197 0.078 0.047
Other 0.31 0.126 0.173

Table A5
Average Skilled Wages Share by Industry, Import Status, and Ownership Type.

Importer Non-Importer Foreign Domestic

Food products, beverages, and tobacco 0.308 0.223 0.366 0.226
Textiles, textile products, leather, and footwear 0.216 0.187 0.231 0.19
Wood and products of wood and cork 0.246 0.211 0.291 0.209
Pulp, paper, paper products, printing, and publishing 0.318 0.287 0.357 0.29
Coke, refined petroleum products, and nuclear fuel 0.495 0.279 0.447 0.286
Chemicals excluding pharmaceuticals 0.456 0.324 0.517 0.353
Pharmaceuticals 0.498 0.38 0.65 0.414
Rubber & plastic products 0.276 0.23 0.316 0.234
Other non-metallic mineral products 0.288 0.194 0.373 0.2
Iron & steel 0.347 0.301 0.342 0.321
Non-ferrous metals 0.322 0.276 0.331 0.283
Fabricated metal products, except machinery & equipment 0.338 0.231 0.372 0.243
Machinery & equipment 0.385 0.26 0.402 0.276
Electrical machinery & apparatuses 0.346 0.287 0.336 0.307
Radio, television, & communication equipment 0.281 0.222 0.261 0.27
Medical, precision, & optical instruments 0.263 0.268 0.292 0.261
Motor vehicles, trailers, & semi-trailers 0.365 0.264 0.39 0.272
Building & repairing of ships & boats 0.239 0.224 0.314 0.221
Railroad equipment & transport equip 0.307 0.237 0.354 0.236
Manufacturing; recycling 0.241 0.191 0.272 0.19
Other 0.393 0.267 0.402 0.289

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