Following up on yesterday's post, we can see how there would be a threshold below which production capital wouldn't form. Here is an expanded version of the table from that post.
Required returns and asset efficiency generally move together. An economy with less secure asset usage (proxied here by "Asset Lifespan") will tend to have higher required returns. Here is a table from Aswath Damodaran at NYU with estimated equity premiums, by nation. Generally, developing economies, like Pacific Rim countries, China, Eastern Europe, Mexico, the better Latin American countries, etc., have required returns (equity premiums plus risk free rate) that are just a few points above developed countries' - in the 8% to 10% range. In my simple model above, this level of returns would correspond to the 50%-60% labor share of income that we see in those countries.
There are many countries, though, that have required returns well above 10%. There is some threshold where low asset utilization and high required returns would simply be too high to justify productive investments. Looking at it through this framework, we can see how these nations would tend toward banana republic status or toward extractive industries. The assets in both of those contexts are land or minerals, which have value based on their endowments instead of based on cost. A factory will tend to have a relative fixed cost, which cash flows (discounted at required return rates) would have to cover. But, the price of land and minerals can fall until the relative returns are high enough to justify investment and labor usage.
But, in those countries, total capital inflows will be very low and labor compensation will also be relatively very low. In the North, Wallis, and Weingast framework of limited access, the high returns in these extremely low wage economies may be enforced through barriers to entry even while existing capital is protected. So, while we might say that institutions that create safety for capital are the key to higher production and higher labor compensation, there is an important distinction to be made. The safe context required for capital is specifically not for existing capital. The safe context applies to new capital.
This can be confusing, though. That safe context must include a credible promise of safety that applies to new capital even when it becomes existing capital. So, the only functional and sustainable model for high labor incomes is a model that offers universal protections to both new and existing capital. There is always a political tendency to favor existing capital. (This is usually imagined as back-room deals with lobbyists and industrialists, but pleas like "saving good jobs" reflect the same error with a populist veneer.) This is the subtle difference between "business friendly" and "market friendly", and even though "market friendly" policies are the path to prosperity, they always have a rhetorical disadvantage against the limited-access pleas of both pro-business and pro-labor factions.