Multinational Enterprises and Between‐Firm Wage Inequality Across European Regions

‘Multinational Firms’ Sourcing Decisions and Wage Inequality: A Dynamic Analysis

This paper uses a two-country dynamic general equilibrium model to consider how, following a trade cost shock, multinational firms’ offshoring decision and the countries’ different factor endowments affect wage inequality between high- and low-skilled workers in the home country. Highlighting task-offshoring, heterogenous firms, and factor proportions, the study sheds light on how offshoring shapes wage inequality along different time horizons. While the paper’s focus is the relationship between the U.S. (home country) and China (foreign country), its findings are more broadly relevant. The three main findings are these: First, both intensive and extensive margins contribute to the widening wage gap, with the latter playing a more important role in the short- to medium- term than it does in the initial stage after the trade cost shock. Second, endogenous firm entry raises wage for both low-skilled and high-skilled workers while also widening the wage gap between the two groups over time. Third, whether firms offshore to a foreign country like Mexico, where the supply of low-skilled laborers is moderately larger than in the home country, or to a country like China, where the supply of low-skilled laborers is vastly larger, makes scant difference to wage inequality in the long term.

This article examines whether inward Foreign Direct Investment (FDI) is a source of wage inequality between skilled and unskilled labour in developing countries. Although the literature has explored wage inequality issues, we studied the impacts of FDI on skill upgrading comprehensively, together with trade and other factors (such as FDI externalities). Specifically, our analysis introduces the origin of FDI, controls for plant heterogeneity and relates the results to the FDI theory on Multinational Enterprises (MNEs). The results show that, on average, FDI caused wage inequality because of FDI-led skill-biased technological change. However, Japanese and Taiwanese investments helped to alleviate the inequality. Japanese and Taiwanese FDI is motivated by cost advantages achieved through vertical FDI and thus increases relative demand for unskilled labour.

Reverse Knowledge Transfers Multinational enterprises (MNEs) are, sina qua non, the world’s most efficient and prolific producers of knowledge (process and product technology, management skills, intangible assets). Once produced, exploiting that knowledge is a primary motivation for foreign direct investment (FDI) as MNEs go abroad to earn rents on their knowledge-based assets created at home. Through the process of FDI, MNEs transfer knowledge and capital to their foreign affiliates in host countries. This picture – MNEs as creators, exploiters and transferrors of knowledge – suggests a one-way transfer from the parent firm in the home country out to foreign affiliates in host countries. However, this picture has been getting old for some time and is now close to obsolete. Most MNEs are now horizontally and vertically integrated networks where knowledge flows in all directions within the network, including the parent firm. MNEs from emerging economies in Asia and Latin America now engage in ‘‘springboard FDI’’, going abroad to explore for knowledge and bringing it home. Metanationals – MNEs ‘‘born in the wrong place’’ – depend on knowledge learned abroad that is transferred back to the parent firm. As a result, knowledge-seeking FDI now commands as much attention from scholars as knowledge-exploiting FDI did in the 1980s. IB scholars have increasingly focused their attention on inbound or reverse knowledge transfers – antecedents, processes and consequences. However, research on knowledge transfers within and by MNEs faces a high hurdle: how does one measure the direction, size and impact of knowledge transfers? The most popular approach has been to track patent data citations. Patent data have provided a relatively easy ‘‘trail’’ for mapping intrafirm and interfirm knowledge flows, both planned transfers and spillovers. Most scholars in this area have used patent data, building on the seminal works of Patel and Pavitt (1991) and Journal of International Business Studies (2009) 40, 177–180 & 2009 Academy of International Business All rights reserved 0047-2506

Little is known about how the dynamic process of pro-market reforms influences the performance of foreign affiliates in emerging economies and how multinational enterprises (MNEs) can deal with such a dynamic process. This study disentangles the dynamic process of pro-market reforms into three dimensions – speed, (un)predictability, and (un)synchronization – and argues that the performance of foreign affiliates suffers when pro-market reforms are slow, unpredictable, and unsynchronized. To mitigate the detrimental impacts of the three distinctive dimensions of pro-market reforms, MNEs can deploy strategies that allow their foreign affiliates to seek local help from other strongly embedded “central” organizations, subnational help from sister affiliates in other subnational regions of the same host country, and global help from parent firms. To test these arguments, this study performs a 10-year longitudinal analysis of 79,763 foreign affiliates operating in China. The results provide evidence that seeking local help is effective in mitigating the negative effect of slow pro-market reforms on foreign affiliate performance, but has no effect on the unpredictability of pro-market reforms. In addition, subnational help is as effective as global help in mitigating the negative effect of unsynchronized pro-market reforms on foreign affiliate performance.

Investment policies have been implemented by policy‐makers in both developed and developing countries to open up their domestic markets to the foreign affiliates of multinational enterprises (MNEs). This study empirically examines two foreign direct investment (FDI) policies: targeted promotion and selective liberalization. It quantifies which of the two targeted measures is more effective in attracting FDI inflows and stimulating the activities of MNEs. We implement a difference‐in‐differences estimation that measures the effects of FDI policies by comparing affected and non‐affected industries before and after the change of the FDI policies in compliance with China's accession to the World Trade Organization. Using aggregated data on foreign equity and output by MNEs' foreign affiliates in China from 1999 to 2007, the results show that selective liberalization has a positive impact on FDI inflows, especially from incumbents; however, targeted promotion does not. Our results highlight the effectiveness of selective liberalization as a policy option for stimulating industrial growth.

The fact that multinational enterprises (MNEs) do not undertake all their research and development (R & D) activities at home has become a matter of recent concern, both in the home and host countries of these companies. Some empirical work has been done on the question of why MNEs decentralize their RD see Mansfield et al. (1979), Lall (1979), H~akansson (1980) and Hirschey and Caves (1981).' To the best of my knowledge, the study by HWkansson (1980) is the only one that deals with the determinants of the R& D intensity of MNE affiliates, but it is confined to subsidiaries that carry out R& D, while foreign affiliates that do not are excluded.2 Furthermore, the analysis does not take into account the characteristics of the MNE to which the affiliates belong. Our study investigates the factors that explain the R & D intensity of foreign subsidiaries of Swedish MNEs, using data for 1978. Following Haikansson (1980), we concentrate on the technological capabilities developed at the subsidiary level, but in contrast to him, we take into account both affiliate, host country, and parent company characteristics. Furthermore, our sample includes those foreign affiliates that do not perform R & D, which leads us to use a Tobit model. The study proceeds as follows. Section II focuses on some factors of importance in determining the amount of research activity carried out by foreign affiliates. In Section III we present the data and describe the model and method of estimation used. The empirical results are presented in Section IV. We draw the main conclusions in Section V.

This article analyses the dynamics of wage and income inequality in Slovenia from 1993 to 2002, using two different data sources. The first is obtained by extracting relevant information on wage earners from the personal income tax (PIT) database and the second is obtained using published data on wages and the wage distribution. Analyses of both datasets clearly show a large increase in wage inequality in 1993–95. However, even after 1995 wage inequality has been creeping up. To a large degree, we ascribe the major increase in wage inequality to the rapid development of a full-fledged market economy and also to the changing PIT legislation. A growing individualisation of wage contracts doubtless also contributed to increased inequality. In addition, our analysis touches upon the effects of the tax system and shows that it significantly moderated the large increases in income inequality.

Prior studies have found that foreign affiliates of multinational enterprises (MNEs) suffer from liability of foreignness (LOF). Foreign affiliates may be able to improve their social legitimacy and overcome LOF by demonstrating social commitment to host-country constituents through corporate social responsibility (CSR). If LOF is positively related to the distance between the home and host countries, and CSR activities confer social legitimacy benefits on foreign affiliates, we should expect CSR activities and distance to be positively related. However, we argue that, despite this potential motivation, foreign affiliates from more distant home countries are in fact less likely to engage in host-country CSR. Our argument focuses on the ways in which distance affects the MNE's willingness and ability to engage in CSR abroad. We also predict that host-country CSR reputation negatively moderates this relationship. Using Community Reinvestment Act data for foreign bank affiliates from 32 countries in the United States over 1990–2007, we find strong support for our hypotheses. The paper enriches our understanding of CSR practices in MNEs, and of when and how MNEs try to overcome legitimacy issues in host countries.

Multinational enterprises (MNEs) are integrating agents in the world economy by putting the labour, capital and technology available in different countries to most productive use. According to the United Nations' World Investment Report 2000 (United Nations, 2000), over 63 000 parent companies world-wide have established about 690 000 foreign affiliates in countries other than their own, with the amount of inward FDI stock valued at roughly US$4800 billion in 1999. These foreign affiliates are estimated to have generated total gross product of more than US$3000 billion and total employment of over 40 million in host countries. While about 90 per cent of all parent companies are located in OECD countries, more than half of all foreign affiliates are in operation in non-OECD countries, providing a major source of industrial production and employment in a number of developing host countries.1 MNEs are also significant — and often dominant — players in international trade by extending business networks overseas through direct investment, and providing markets for related parties beyond national boundaries. For example, in the USA, where most consistent trade data by ownership is available, about three-quarters of merchandise exports and 70 per cent of merchandise imports in 1997 were associated with either US-owned or foreign-owned MNEs and their foreign affiliates.2

Prior studies have found that foreign affiliates of multinational enterprises (MNEs) suffer from liability of foreignness (LOF). Foreign affiliates may be able to improve their social legitimacy and overcome LOF by demonstrating social commitment to host country constituents through corporate social responsibility (CSR). If LOF is positively related to the distance between the home and host countries, and CSR activities confer social legitimacy benefits to foreign affiliates, we should expect CSR activities and distance to be positively related. However, we argue that despite this potential motivation, foreign affiliates from more distant home countries are in fact less likely to engage in host country CSR. Our argument focuses on the ways distance affects the MNE’s willingness and ability to engage in CSR abroad. We also predict that host-country CSR reputation negatively moderates this relationship. Using Community Reinvestment Act data for foreign bank affiliates from 32 countries in the United States over 1990-2007, we find strong support for our hypotheses. The paper enriches our understanding of CSR practices in MNEs, and of when and how MNEs try to overcome legitimacy issues in host countries.

This paper examines the robustness of previous stochastic dominance tests that find significant total factor productivity (TFP) heterogeneity between firms that export abroad and multinational enterprises (MNEs). We extend this literature by focusing on how ‘within‐MNE’ heterogeneity affects the extent to which one can identify the TFP threshold in the exporter–MNE TFP relationship. Within‐MNE heterogeneity is established by determining both the number and location of the foreign affiliates established by each MNE. In this way, we separate single‐affiliate MNEs from those with multiple affiliates, as well as analyse the role played by vertical FDI, a topic typically ignored in previous stochastic dominance tests of the Helpman et al. (2004, American Economic Review, 94, 300–16) hypothesis. Our empirical tests employ Japanese firm‐level FDI and TFP data for the period 1975–2000. Using Kolmogorov–Smirnov tests to determine stochastic dominance, we find significant TFP heterogeneity within the MNE group based on investment history and affiliate geographic location. While our results confirm the standard HMY three‐tiered classification to exist for Japanese firms, exporter–MNE ‘between‐group’ TFP heterogeneity is sensitive to the ‘within‐MNE’ investment history heterogeneity. We note that single‐ and two‐affiliate MNEs are statistically more similar to exporting firms than to MNEs with greater foreign affiliate totals. This shows the exporter–MNE TFP threshold to be not as explicit as Helpman et al. (2004, American Economic Review, 94, 300–16) suggest. In fact, our results allow us to identify the MNE‐side width of Girma et al.’s (2005, Economic Letters, 83, 317–24) ‘uncertainty region’ surrounding this threshold. Finally, we also find a strong TFP–market orientation relationship exists where the most productive firms follow complex integration strategies, lesser TFP firms do horizontal FDI, and the least productive MNEs do vertical FDI.

A multinational enterprise (MNE) seeking to maximize its profits must decide whether to emphasize production within its home country-based facilities or at its affiliates abroad. We examine what determines the choice between exporting and FDI by the U.S. food processing industry. We also analyze whether trade and FDI are complements or substitutes, i.e., whether foreign affiliate sales have positive or negative impacts on exports. Results indicate that U.S. exports and affiliate sales (due to outward FDI) have both been increasing but sales by foreign affiliates far exceed exports. Also, results show that U.S. exports and FDI are complements, in the sense that exports have a positive effect on FDI and vice versa, FDI has a positive effect on exports. Furthermore, a nation’s GNP per capita was found to be an important factor in determining sales by foreign affiliates. Finally, the results suggest that owners of capital in the processed food industry stand to gain more than the workforce because the former disproportionately benefit from their returns on investment in the long run.

IntroductionThe relative wage of more-skilled to less-skilled Americans has been rising sharply since the late 1970s. 1 At the same time, within most industries relative labor demands have been shifting toward the more skilled. 2Many economists have argued that these within-industry labor-demand shifts are a primary cause of the rising skill premium, but there is still disagreement about what caused the demand shifts.They are consistent with skill-biased technological change (SBTC), as many researchers have pointed out.However, they are also consistent with explanations related to international trade, and there remains uncertainty about which forces have contributed to skill upgrading.For example, Feenstra and Hanson (1996a,b) find outsourcing to be correlated with skill upgrading, whereas Autor, et al (1998) conclude outsourcing's effect is not robust to other forces such as computerization. 3 Most research has focused on trade and technology as demand shifters.The focus on trade is understandable because of the rapidly growing importance of trade in the U.S. economy.However, foreign direct investment (FDI) by multinational enterprises (MNEs) both into and out of the United States has on many measures grown even more rapidly.For example, from 1977 to 1994 U.S. manufacturing imports as a share of U.S. manufacturing shipments rose from 7.0 percent to 14.2 percent.During the same period, foreign-affiliate manufacturing sales in the United States as a share of U.S. manufacturing shipments rose from 5.6 percent to 17.3 percent.This growth of foreign-owned manufacturing affiliate presence in the United States has paralleled the rise in U.S. wage inequality.Figure 1 shows the U.S. skill premium (measured as the ratio of average annual wages of non-production workers to average annual wages of production workers) and the share of foreign-owned affiliate employment in total U.S.1 Several economists have documented this fall in terms of education, experience, and job classification.Bound and Johnson (1992) find that between 1979 and 1988, the ratio of the average wage of a college graduate to the average wage of a high school graduate rose by 15 percent.Davis (1992) finds that between 1979 and 1987, the ratio of weekly earnings of males in their forties to weekly earnings of males in their twenties rose by 25 percent.For all U.S. manufacturing, we find that between 1979 and 1994 the ratio of average annual wages of non-production workers to average annual wages of production workers rose by 10 percent, from about 1.52 to 1.67. 2 Many studies have found that even though the relative wage of more-skilled workers has been rising, within most industries relative employment of these workers has risen.This evidence strongly suggests within-industry demand shifts.3 The link between SBTC and overall wage inequality depends crucially on whether there is one aggregate output sector or many.In one-sector models SBTC always raises the skill premium, but in multi-sector models what usually matters is the sector bias of technological change, not its factor bias. See Haskel and Slaughter (1998).

There has been little analysis of the impact of inward foreign direct investment (FDI) on U.S. wage inequality, even though the presence of foreign-owned affiliates in the United States has arguably grown more rapidly in significance for the U.S. economy than trade flows. Using data across U.S. manufacturing from 1977 to 1994, this paper tests whether inward flows of FDI contributed to within-industry shifts in U.S. relative labor demand toward more-skilled labor. We generally find that inward FDI has not contributed to U.S. within-industry skill upgrading; in fact, the wave of Japanese greenfield investments in the 1980s was significantly correlated with lower, not higher, relative demand for skilled labor. This finding is consistent with recent models of multinational enterprises in which foreign affiliates focus on activities less skilled-labor intensive than the activities of their parent firms. It also suggests that if inward FDI brought new technologies into the United States, the induced technological change was not biased towards skilled labor.