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

A comparative analysisAlexander 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

a) FDI stocks and world GDP are expressed in current US Dollars.

Global FDI stocks as a percentage of world GDPa

0

5

10

15

20

25

30

1980 1985 1990 1995 2000 2005

Global stock of outward FDI Global stock of inward FDI

3

The bulk of FDI continues to take place between OECD

countries, but non-OECD share growing rapidly

Non-OECD countries OECD countriesa

Trends in foreign direct investment by groups of countries, 1990-2005

Foreign direct investment in billions of US dollars at constant prices (2000)

A. Inward FDI B. Outward FDI

10.3% 12.5%14.8%

16.5%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1990 1995 2000 2005

21.6% 24.6%

29.6%31.7%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1990 1995 2000 2005

4

FDI is most important source external finance for many

developing countries

Source: OECD calculations based on World Bank, World Development Indicators database.

Percentage of total GDP for all developing countries

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1980 1985 1990 1995 2000 2005

Foreign direct investment (net inflows)

Workers' remittances and compensation of employees

Official development assistance and official aid

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

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

6

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

7

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

8

Theoretical background

• In perfectly competitive setting, no reason for MNEs to offer better pay and working conditions to similar individuals 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

9

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

10

Hypotheses

1. The incentive to offer better working conditions is likely to be greater for MNEs from developed countries that operate in developing countries

2. The incentives of MNEs to offer better working conditions are generally expected to be stronger in the context of skilled workers

3. 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

11

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

01

01

if 1

if 0

jtjt

jtjtTi FF

FFT

0,1

01

if 1

if 0

tjkjt

jtjtMi FF

FFT

12

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

)0()1(ˆ 01 TyETyEATT

13

Balancing tests

UK

Germany

Unmatched Matched Unmatched Matched

Sample 1B

3/20 0/20

Sample 1C

1/15 0/15

Sample 2B 114/447 13/447 Sample 2C 64/277 9/277 Sample 2D 55/313 0/313 18/29 0/29

Sample 2E 47/300 3/300 22/29 0/29

Sample 2F 96/250 2/250 21/29 0/29

Sample 2G 62/247 1/247 21/29 5/29 Each cell reports the number of t-tests significant at 95%

14

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

it

tttt

titiit DDTy

2

0

2

0

15

Data sourcesBrazil Germany Indonesia Portugal United Kingdom

Data sources RAIS, Global Mergers and Acquisitions Database (Thomson Financial Securities) and Orbis (Bureau van Dijk)

Institut für Arbeitsmarkt- und Berufsforschung (IAB) Establishment Panel and Beschäftigtenstatistik.

Survei Manufaktur, the Indonesian Census of Manufacturing

Quadros de Pessoal or 'Personnel Records'

Business Structure Database (BSD) and Annual Survey of Hours and Earnings (ASHE) for worker-level analysis.

Unit of observation in business survey that is used for the analysis

Firm Plant Plant Firm Firm (called 'enterprise')

Sample selection All firms with at least one employee.

All plants with employees subject to social security. Large plants are oversampled. The sample comprises about 1% of plants and 10% of employees.

The census surveys all registered manufacturing plants with more than 20 employees.

All firms with at least one employee.

The BSD includes all enterprises whose plants are subject to VAT or social security.

Sectoral coverage Manufacturing and services

Manufacturing and services

Manufacturing Manufacturing and services

Manufacturing and services

Time coverage 1995-2005 2000 and 2004 1997-2005 except 2001

1997-2004 1997-2005 16

Wage distribution by ownership status in UK and

Germany

17

Number of switchers

Germany

United Kingdom

Treatment Individuals % sample Individuals % sample

Takeovers - foreign of domestic 4,499 1.13 4,679 1.06 Takeovers - domestic of foreign 12,426 3.13 10,162 2.30 Movers - domestic to foreign 745 0.19 4,552 1.03 Movers - foreign to domestic 450 0.11 3,064 0.69

18

Firm-level evidence of cross-border takeovers on average

wages

Average effect 0.025 0.078 *** 0.050 ** 0.111 ** 0.189 ***Effect at t=0 na 0.046 * 0.038 0.100 * 0.175 ***

t=1 na 0.106 *** 0.059 ** 0.077 0.206 **t=2 na 0.081 *** 0.053 * 0.157 ** 0.221 **

Average effect -0.004 -0.009 -0.061 na -0.110 *Effect at t=0 na 0.000 -0.049 na -0.119 *

t=1 na -0.015 -0.063 na -0.097t=2 na -0.012 -0.072 na -0.058

Foreign takeovers of domestic firms

Domestic takeovers of foreign firms

Germany PortugalUnited

KingdomBrazil Indonesia

19

Worker-level evidence of cross-border takeovers on stayer

wages

Average effect 0.028 *** 0.037 *** -0.004 0.012 ***Effect at t=0 na 0.015 *** 0.004 0.044 ***

t=1 na 0.051 *** -0.003 -0.013 ***t=2 na 0.045 *** -0.012 0.004 **

Average effect 0.005 * -0.037 *** 0.022 naEffect at t=0 na -0.076 *** -0.005 na

t=1 na -0.045 *** 0.030 nat=2 na 0.011 0.039 * na

PortugalUnited

KingdomBrazil

The effects of domestic takeovers of foreign firms on wages

Germany

The effects of foreign takeovers of domestic firms on wages

20

Worker-level evidence of job movers on wages

Average effect 0.080 * 0.136 *** 0.061 ** 0.213 ***Effect at t=0 na 0.115 *** 0.034 0.160 ***

t=1 na 0.138 *** 0.062 ** 0.228 ***t=2 na 0.154 *** 0.087 *** 0.252 ***

Average effect -0.024 -0.037 *** 0.013 -0.016 *Effect at t=0 na -0.050 *** -0.000 0.013

t=1 na -0.040 *** 0.030 0.040 ***t=2 na -0.020 *** 0.010 -0.101 ***

From foreign to domestic firms

From domestic to foreign firms

Germany PortugalUnited

KingdomBrazil

21

Firm-level evidence of foreign takeovers on wages by skill

group

22

Average effect 0.088 0.166 *** 0.11 * 0.295 ***Effect at t=0 0.011 0.167 *** 0.112 0.262 ***

t=1 0.113 0.142 0.093 0.333 ***t=2 0.142 0.099 0.125 * 0.456 ***

Brazil IndonesiaBrazil IndonesiaUnskilled workers Skilled workers

Worker-level evidence of foreign takeovers on wages by

skill group

23

Average effect 0.018 *** 0.019 *** -0.025 ** 0.054 ***Effect at t=0 na -0.005 -0.007 0.046 ***

t=1 na 0.031 *** -0.031 *** 0.053 ***t=2 na 0.033 *** -0.036 *** 0.067 ***

Average effect 0.027 *** 0.053 *** 0.006 0.008 ***Effect at t=0 na 0.028 *** 0.009 0.048 ***

t=1 na 0.085 *** 0.010 -0.019 ***t=2 na 0.049 *** -0.000 -0.007 **

Average effect 0.014 *** 0.041 *** 0.001 -0.046 ***Effect at t=0 na 0.022 *** -0.006 0.027 ***

t=1 na 0.050 *** 0.015 -0.108 ***t=2 na 0.049 *** -0.005 -0.061 ***

Germanyb PortugalUnited

KingdomBrazil

Unskilled workers

Semi-skilled workers

Skilled workers

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

conditions

Average effect -0.291c -0.002 -0.001 -0.002 ***Effect at t=0 na -0.003 0.001 -0.001 ***

t=1 na -0.009 *** 0.002 -0.005 ***t=2 na 0.007 ** -0.006 0.000

Average effect -0.034 0.055 ** na 0.052Effect at t=0 na 0.020 na 0.029

t=1 na 0.078 ** na 0.057t=2 na 0.066 ** na 0.070 *

Average effect na 0.006 *** -0.002 0.001 ***Effect at t=0 na -0.000 -0.006 0.001

t=1 na 0.011 *** 0.001 0.002 ***t=2 na 0.007 ** -0.000 0.001

Average effect -0.056 na -0.039 ** naEffect at t=0 na na -0.008 na

t=1 na na -0.053 *** nat=2 na na -0.055 *** na

Log weekly hours

Germany PortugalUnited

KingdomBrazil

Union wage premium

Worker turnover

Low pay

24

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)

25

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

26