Foreign investment with agricultural modernization and wage inequality in developing countries: agricultural operation scale matters

Although the relationship between foreign capital and wage inequality has received intensive attention, evidence has been far from conclusive. We consider this issue from agricultural modernization and operation scale aspects, which are largely ignored. Foreign capital reduces the price of non-agricultural goods, encouraging agriculture to use more intermediate inputs and promoting agricultural modernization. However, intermediate inputs play a distinctive impact on agricultural employment in large- and small-scale agriculture. Theoretical results show foreign investment reduces (conditionally expands) wage inequality in large-(small) scale agriculture. By employing data from China, we calibrate the parameter and obtain an inequality-exacerbating effect in small-scale agriculture economy.