Do multinational enterprises provide better pay and working conditions than their domestic counterparts? A comparative a

1. Do multinational enterprises provide better pay and working conditions than their domestic counterparts?A comparative analysis Alexander Hijzen (OECD and GEP, University of Nottingham) Pedro Martins (Queen Mary, University of London and IZA) Richard Upward (University of Nottingham and GEP) 9 January 2009, Paris

2. The growing importance of FDI • The global stock of FDI has increased from less than 5% of world GDP in 1980 to more than 25% in 2006

3. The bulk of FDI continues to take place between OECD countries, but non-OECD share growing rapidly

4. FDI is most important source external finance for many developing countries

5. The potential benefits of FDI in host countries • Policy-makers in many countries tend to emphasize the potential benefits that FDI can bring to the host economy • MNEs need some sort of productivity advantage to overcome the costs of competing in foreign markets • Direct benefits: MNEs share productivity advantage with employees to motivate the workforce and minimise turnover • Indirect benefits: positive externalities due to knowledge (or ‘productivity’) spillovers from foreign to domestic firms

6. Foreign ownership & wages • Burgeoning literature on MNEs, productivity and wages • Convincing evidence that multinationals firms are more productive than domestic firms • Until recently, consensus based on firm-level evidence that foreign firms also offer higher wages than local firms, particularly in developing countries • New evidence based on LEED challenges the conventional wisdom by suggesting smaller or even negative foreign wage premia

7. Foreign ownership & non-wage working conditions • Limited work on the effects of foreign ownership on other aspects of workers’ employment conditions • MNEs appear to have low tendency to export labour practices to their foreign affiliates in developed countries (Bloom et al., 2008) • No evidence on the propensity of MNEs to export working conditions in developing countries

8. Contribution • To analyse the impact of foreign ownership on workers • by providing internationally comparable evidence using LEED for Brazil, Germany, Portugal and the UK (and Indonesia at firm-level) • looking at wages, but also other employment conditions such as working hours, low pay, job stability and union bargaining power

9. Theoretical background • In perfectly competitive setting, no reason for MNEs to offer better pay and working conditions to similarindividuals doing a similar job • But, there may still be differences in pay between domestic and foreign-owned firms • Compensating differentials • Workforce composition and HR practices

10. Theoretical background • Market failures may give rise to differences in pay and working conditions between multinational and domestic firms for individuals with similar characteristics doing a similar job. • Presence of search frictions may link working conditions to firm productivity • Greater importance of firm-specific assets and pay incentives in MNEs may give rise to efficiency wages • MNEs may have stronger bargaining position relative to trade unions

11. Hypotheses The incentive to offer better working conditions is likely to be greater for MNEs from developed countries that operate in developing countries The incentives of MNEs to offer better working conditions are generally expected to be stronger in the context of skilled workers To the extent that it takes time to acquire firm-specific knowledge, the incentive to offer better working conditions should also increase with job tenure

12. Empirical set-up • Four possible treatments: cross-border takeovers (2x) and job movers (2x): • We use DiD PSM to overcome the problem of missing counterfactual

13. Implementation PSM • Propensity score matching • Probit of ownership status on industry, region, gender and skill dummies, log employment, log average wage, log individual wage, age, age squared and tenure • One-to-one nearest neighbour matching • Implemented separately by year, economic sector and skill group

14. Balancing tests

15. Implementation DiD • Difference-in-differences • Follow individuals for a period of four years from t=-1 to t=2 • Observe effect of treatment at three points in time at t=0, t=1 and t=2 • Panel is balanced over each 4-year window

16. Data sources

17. Wage distribution by ownership status in UK and Germany

18. Number of switchers

19. Firm-level evidence of cross-border takeovers on average wages

20. Worker-level evidence of cross-border takeovers on stayer wages

21. Worker-level evidence of job movers on wages

22. Firm-level evidence of foreign takeovers on wages by skill group

23. Worker-level evidence of foreign takeovers on wages by skill group

24. The effects of foreign takeovers on other wage and non-wage working conditions

25. Concluding remarks I • Comparative analysis using LEED of role foreign ownership for wages and working conditions • The firm- and worker-level results suggest that FDI may has positive effect on wages in foreign-owned firms • Consistent with previous studies that foreign wage premia are more important in developing economies • In short-term, the foreign wage premia primarily accrue to new employees • In longer term, the positive effects are likely to spread through the entire workforce (OLS estimates provide upper bound)

26. Concluding remarks II • The question whether MNEs promote better working conditions is complex • The evidence that foreign takeovers affect working conditions other than average wages is considerably weaker • The impact of foreign takeovers on non-wage working conditions is not unambiguously positive • Little evidence to suggest that MNEs export working conditions abroad • Comparative analysis with LEED most useful when interested in the role of labour market institutions for labour market adjustment