Compositional and Scale Effects: How Foreign Direct Investment Shapes Informal Employment in Latin America, 2000-2018

How does foreign direct investment (FDI) affect informal employment in the Global South? Existing scholarship has produced inconsistent findings, in part because it treats FDI as a homogeneous developmental input. We advance a “compositional framework” that links national labor market outcomes to distinct multinational corporate motivations: resource-seeking FDI creates enclave economies with limited local labor market integration; market-seeking FDI generates backward linkages that facilitate formalization; and efficiency-seeking FDI pursues labor cost arbitrage through flexible, informal employment arrangements. Using a novel dataset of 16 Latin American countries (2000-2018), we employ a relative-shift regression framework to isolate compositional effects from aggregate scale effects. Results reveal that, relative to market-seeking (service) investment, both resource-seeking (primary) and efficiency-seeking (manufacturing) FDI significantly increase informal employment, while aggregate net FDI inflows show no association with informality. These findings demonstrate that the structural composition of foreign capital, not merely its volume, shapes labor market stratification in the Global South.