Empirical Evidence on the Labor-Market Impacts of Foreign Direct Investment and Multinational Enterprises

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Less-skilled workers in the United States and many other countries have experienced wage declines in recent decades, both in real terms and/or relative to more-skilled workers. These developments are an important policy issue, and they have also been the focus of a large body of academic research. In particular, a number of economists have examined the role of increased international trade. There is still no clear consensus, however, about how much international trade has pressured wages -- either absolutely or relative to other forces such as technological change. This project aims to broaden the research focus of "trade and wages" in two ways. First, I plan to consider international linkages other than just trade -- in particular, foreign direct investment (FDI) of multinational enterprises (MNEs). Second, I plan to consider labor-market outcomes other than just wages --for example, labor-demand elasticities. To date, there are very few empirical studies of the labor-market impacts of FDI and MNEs. I plan to build on these studies using a newly available firm-level panel data set covering the United Kingdom manufacturing sector annually from 1970 forward. These data contain a lot of information, in particular the nationality of each firm's ultimate owner, which make it well suited to questions of how FDI by MNEs affects labor markets. Specifically, the project aims to address three main issues. First, I plan to look for globalization pressures not the prices for labor but rather in the elasticities of demand for labor. Changing elasticities can matter for a number of reasons. Higher elasticities shift the incidence of non-wage labor costs; they trigger more-volatile responses to any exogenous labor-demand shocks; and they shift from labor towards capital bargaining power over any extranormal profits. In theory, greater international linkages via FDI and other forces increase labor-demand elasticities in two main ways: by making output markets more competitive and by making domestic labor more substitutable with foreign factors of production. These effects can arise in the absence of factor-price changes. This means that finding little effect of globalization on wages can be entirely consistent with finding a large effect on elasticities. Despite the plausible case for globalization making labor demands more elastic, there is almost no empirical evidence on this subject. Second, I plan to examine whether FDI improves firm performance or whether good firm performance induces FDI. In many countries it is has been documented in cross-sectional data that MNE affiliates are "better performers" than domestic firms -- i.e., show higher labor productivity, pay higher wages, etc. But cross-sectional evidence alone cannot distinguish the two alternative causal explanations between MNEs and firm performance. Understanding causation here is particularly relevant for policy, as many MNE-attracting policies presume that FDI improves firm performance. With the U.K. panel data I can examine more clearly the links between MNEs and firm performance. Third, I plan to examine whether foreign affiliates of MNEs generate spillovers to domestic plants. Recent research has found negative spillovers in some developing countries. This negative correlation might be caused by developing countries lacking sufficient human capital and infrastructure needed to reap positive spillovers. For a developed country like the United Kingdom the nature of FDI spillovers might be very different. This can be examined with the U.K. data; in particular, I can see if the nature of spillovers varies by MNE country ownership.