Monday, August 04, 2008

US overseas income

Returning to US overseas income. Alexander Hijzen looks at FDI and the effect on local wages.

Do foreign multinationals pay higher wages than domestic firms? Simple comparisons suggest they do. Moreover, wage differences between MNEs and local firms tend to be larger in developing countries, presumably reflecting the larger productivity advantage MNEs over local firms in those countries. Simple comparisons between MNEs and local firms, however, overstate the contribution of FDI to improving pay, because FDI is typically concentrated in the most advanced sectors and largest firms in the host economy, which would pay above-average wages even if they were locally owned. Even after correcting for this bias, it is still the case that MNEs offer better pay than domestic firms, particularly in developing countries where their productivity advantage is greatest.

It is probably the case that the full productivity is not reflected in wages. The pull from low level of local wages probably ensure that some of the productivity improvement is taken by the (possibly US-owned) MNE. However, it is much harder to achieve this in the competitive US market.

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