Abstract
In this paper we study how the expansion of multinational enterprises in the host country affects its wages using a general equilibrium factor specific framework for a small open economy with a flexible labor market. We identify three potential effects of MNE activity associated with the transfer of foreign knowledge, diffusion of this knowledge among indigenous firms and the inflow of capital from abroad. We show that the impact of multinational enterprises on wages in the host country depends on differences in capital intensity between multinational and local sectors, the amount of capital transferred to the host country from abroad and the magnitude of knowledge spillovers stemming from multinational activity to indigenous firms.
Highlights
The effects of the activity of multinational enterprises (MNEs) on wages in the host economy have long been a controversial topic
In this paper we focus on the stock of foreign knowledge transferred from parent firms to Multinational Enterprises, Foreign Knowledge... 9 their overseas subsidiaries, instead of capital inflows, as the main measure of the MNE activity in the host economy
In this paper we have studied the impact of the expansion of the multinational enterprises on the labor market in the host country using a simple two-sector three-factor general equilibrium model for a small open economy with a flexible labor market
Summary
The effects of the activity of multinational enterprises (MNEs) on wages in the host economy have long been a controversial topic. The contemporary literature views the activity of MNEs in a broader context, not just the international movement of capital but rather “...a set of economic activities or operations carried out in a host country by firms controlled or partly controlled by firms in some other (home) country These activities are, for example, production, employment, sales, the purchase and the use of intermediate goods and fixed capital, and the carrying out of research”. We identify the conditions that need to be satisfied for the host country to experience an increase in wages due to the activity of MNEs. In contrast to the previous literature to study this impact, we use a general equilibrium model for a small open economy with a flexible labor market.
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