MNEs و دستمزد: نقش اثر سرایتی بهره وری و بازار کار ناقص

Disentangling the labor market implications of increased foreign capital flows remains important. This paper provides a unifying framework allowing to study the wage implications of multinational enterprise (MNE) activities, pointing to the importance of controlling for both labor market imperfections and productivity spillovers from foreign to local firms. Results show that increased MNE activities increase average wages in the local economy while contributing to a larger wage dispersion between the MNE and local firms. While the results pertaining to average wages depends heavily on the frictions in the labor market, how much the wage dispersion alters also depends on the extent of productivity spillovers from the MNEs to the local firms and the complementarity between domestic and foreign capital.

The increasing prominence of Multinational Enterprises (MNEs) in the worldwide production activities over the past decades has generated significant interactions between them and the local firms.1 According to UNCTAD's, 2007 World Investment Report over the past two and a half decades the number of workers employed in the foreign affiliates of MNEs has increased threefold and represents around 3% of worldwide employees. This ever-increasing presence of MNEs in global production is expected to create both productivity and wage spillovers. Indeed one would expect that productivity and wage spillovers from MNEs to local firms occur simultaneously, where the extent of both spillovers depends on each other. While the literature has focused on both spillovers independently, studies that take into account the possible interactions among the two spillovers are very few in number. Furthermore, in disentangling the labor market effects of increased foreign firm presence most of the studies have assumed perfectly competitive labor markets, ignoring possible frictions. The following exercise seeks to identify the individual role played by the labor market imperfections and the extent of productivity spillovers on the wage spillovers from increased foreign firm presence. The analysis not only allows to identify the wage spillovers from MNEs to domestic wages but also allows studying the wage premium paid by foreign firms under different extents of productivity spillovers and labor market imperfections.2 We construct a model where the productivity spillovers and labor market imperfections are explicitly modeled and we study three main questions: How do the absolute wages paid by foreign and local firms compare in cases with or without labor market imperfections and productivity spillovers from foreign firms? How does the foreign firm premium, defined as the ratio of the wages paid by foreign to those paid by local firms, differ across these models? Finally, does taking into account the labor market imperfections and productivity spillovers alter our expectations of how absolute wages and foreign firm premium change upon increased foreign direct investment (FDI)? Ample studies have looked into the productivity spillovers from foreign to domestic firms, ranging from studies on Venezuela by Aitken and Harrison (1999), on Indonesia by Blomström and Sjöholm (1999) on the Czech Republic by Djankov and Hoekman (2000), on Lithuania by Javorcik (2004), on the US by Keller and Yeaple (2003) and on the UK by Haskel et al. (2007), among many others. Another strand of the literature has focused on the wage spillovers from foreign to domestic firms, including studies by Aitken et al., 1996, Feenstra and Hanson, 1996 and Lipsey and Sjoholm, 2004, among others. However, none of these studies look into the interactive role played by the two spillovers, and explicitly model the link between productivity spillovers, labor market imperfections and wage spillovers. This paper tries to fill this gap in the literature. As identified by Aitken et al., 1996, Feenstra and Hanson, 1996 and Lipsey and Sjoholm, 2004, among others, foreign firms tend to pay different wages than domestic firms. While studies by Driffield and Girma, 2003, Conyon et al., 2002, Martins, 2004 and Aitken et al., 1996 document the foreign firm premium to be greater than one, where the foreign firms pay higher wages than domestic firms, Lipsey and Sjoholm, 2004, Almeida, 2007, Barry et al., 2005 and Girma et al., 2001 suggest that this is not always the case, there are instances where the domestic firm pays higher wages than foreign firms do.3 In the following exercise we study the role played by labor market imperfections and the extent of productivity spillovers in influencing the level of the foreign firm premium, as well as how the foreign firm premium evolves when the MNEs activities in the host country increase. In summary, taking cue from the void in this literature, the following analysis shows the importance of taking into account both the extent of productivity spillovers and the labor market imperfections when studying wage spillovers. In this manner, this study is closely related to Barry et al. (2005) who explicitly study the counteracting roles of productivity spillovers and labor-poaching activities of MNEs in generating wage spillovers and also allow for frictions in labor markets but unlike this paper they do not formally model for these imperfections in the labor market. The below analysis adds to this framework by formalizing the imperfections in the labor markets by use of search models.4 Using a very basic search model framework we are able to shed light onto the three questions we pose. Results point to the important role played by the labor market imperfections and productivity spillovers in all three aspects. Results suggest that, when labor market imperfections are taken into account upon increased FDI average wages in the economy will increase, where both foreign and domestic firms pay higher wages. Therefore the model supports the idea that foreign direct investments (FDI) create wage spillovers, where increased foreign firm presence increases wages paid by domestic firms. However, the dispersion in wages between those paid by foreign and local firms, i.e. the foreign firm premium, is altered upon increased MNE activities. While the former result is independent of whether or not there are any productivity spillovers from foreign to domestic firms, the extent of the change in the wage dispersion critically depends on the extent of productivity spillovers. The higher the extent of productivity spillovers less is the change in the foreign firm premium (or in other words less the change in wage dispersion). This theoretical finding has a significant bearing on the empirical literature that seeks to identify the wage effects of increased FDI. The framework points to the importance of controlling for the labor market imperfections in empirical estimation of the impact of increased MNE activities on wages. Reduced form estimation equations based on this unifying framework should ensure that when estimating the link between local or foreign firm wages and FDI one controls for both the local and foreign firm productivities, both the domestic and the foreign firm capital stock, and final good prices. As such, this framework points to important omitted variables in many of the existing empirical wage studies linking FDI and wages, and it explains why wages, both absolute and relative, differ in level across countries and in how they change after increased FDI. The rest of the paper is structured as follows. The model is discussed in Section 2, results are presented in 3 and 4 concludes.

A unifying theoretical framework which incorporates realistic labor market imperfections and productivity spillovers is constructed to study the wage implications of increased FDI. Wage determination follows a usual search model framework where the workers can move from being unemployed to being employed in either a domestic or a foreign firm. Frictions in the labor mobility point to a wage determination in both domestic and foreign firms as a weighted average of the marginal revenue product of the worker and the reservation wage, where the weights depend on the labor market imperfections. The framework points to the important role played by the labor market frictions, how these frictions evolve with FDI and the productivity spillovers and complementarity of domestic and foreign capital in the determination of the average and relative wage implications of FDI. This result points to the importance of a co-discussion of productivity and wage spillovers, and a discussion within a framework that takes labor market imperfections into account. The empirical specifications testing for the wage effects of globalization should be based on the final equations from such a unifying framework to avoid omitted variable biases.