Which boats are lifted by a foreign tide? Direct and indirect wage effects of foreign ownership

Sourafel Girma,Erasmus Kersting,Holger Görg

doi:10.1057/s41267-019-00248-2

Abstract

The attraction of foreign direct investment (FDI) is considered to be of particular importance for emerging economies because it represents a channel through which international convergence in standards of living may be achieved. One important effect of FDI is its impact on wages, both within the targeted firm (direct) and the local firms within the same geographic region and sector (indirect). In this paper, we investigate the question whether multinational enterprises (MNEs) raise or lower wages directly and indirectly, both theoretically and empirically. Importantly, the magnitude of these changes may depend on how many firms in the sector are already foreign-owned. Generally, the effect of MNEs on wages has not been studied as intensively in the international business (IB) literature as other aspects of FDI, and ours is the first article to specifically investigate the moderating effect of variation in foreign employment shares across industry–province cells (clusters). Using Chinese data on 146,199 firms, we estimate the direct wage effect of foreign ownership to be positive and to increase with the employment share of foreign-owned firms. We also find that the indirect effect on domestic wages varies with the foreign share and may even turn negative.

Highlights

Over the last two decades, a large literature has emerged that investigates performance differentials between multinational enterprises (MNEs) and local firms, and possible productivity spillovers to host country firms (e.g., Chang, Chung & Moon, 2013a; Arnold and Javorcik, 2009; Liu, Siler, Wang & Wei, 2000; Buckley, Clegg & Wang, 2002; Javorcik, 2004)
As the existence of such ownership advantages implies that there is a potential for productivity spillovers to domestic firms, a large literature has developed to look for such effects
We show that there may be indirect wage effects of foreign ownership even without specific assumptions regarding the nature of spillovers to local firms, be they productivity gains, cost reductions or changes in union bargaining power

Summary

Introduction

Over the last two decades, a large literature has emerged that investigates performance differentials between MNEs and local firms, and possible productivity spillovers to host country firms (e.g., Chang, Chung & Moon, 2013a; Arnold and Javorcik, 2009; Liu, Siler, Wang & Wei, 2000; Buckley, Clegg & Wang, 2002; Javorcik, 2004). In contrast to the extensive work on productivity effects, the implications of MNEs for wages in host countries have drawn relatively little academic attention in the IB literature so far (a notable exception being Clougherty, Gugler, Sørgard & Szucs, 2014). This is in spite of scholars pointing to the importance of research on the effect of MNE presence on host country working conditions in general and wages in particular (Wells, 1998; Meyer 2004; Haskel, Lawrence, Leamer & Slaughter, 2012; Kobrin 2017). They emphasize the importance of understanding all the consequences of an increased MNE presence especially in developing and emerging economies that hope for a rapid ascension of the technology ladder

Methods

Findings

Discussion

Conclusion