International linkages, technology transfer, and the skilled labor wage share: Evidence from plant-level data in Indonesia.

• In most developing countries like Indonesia, there are limited in-house R&D efforts. • International linkages are the main causes of skill-biased technological change. • Technology transfer through international linkages effects the skilled wage premium. • We use correlated RE Probit, an "IV" estimate, and FE quantile regression. • Importing and foreign direct investments lead to increased skilled wage premium. This paper examines whether technology transfer through international linkages (such as the importing 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) approach), we find that the import of intermediate inputs and foreign direct investment likely facilitate the transfer of technologies from advanced nations, which then results in skill-biased technological change and increased relative skilled labor wage share. These results indicate that, contrary to standard trade theory predictions, international linkages can lead to increased demand for skilled labor and a potential widening of the skilled-unskilled labor wage gap in Indonesia. Our findings support the theoretical 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) the skilled wage premium. [ABSTRACT FROM AUTHOR]