Foreign Direct Investment and Wages: Does the Level of Ownership Matter? - Economic Research Forum (ERF)

Foreign Direct Investment and Wages: Does the Level of Ownership Matter?

Cagatay Bircan


Date:
November, 2014

NO.
882

Length:
40 pages

Topic:
C3. Multiple or Simultaneous Equation Models
F2. International Factor Movements and International Business

This study hypothesizes that the level of foreign equity participation is a key determinant of the multinational wage premium. In particular, the breakdown of equity in a foreign investment project determines the extent to which a multinational parent company transfers proprietary assets to its affiliate, directly impacting worker productivity. Moreover, it indicates multinationals’ desire to restrict labor turnover and preserve human capital in light of organizational changes and training. Using detailed plant-level data from Turkey, the study finds strong support for these mechanisms. The results show that up to 15 percentage points of the multinational wage premium can be explained by the level of foreign ownership per se. They also indicate that greater foreign equity participation leads to greater transfer of both tangible and intangible assets and thus higher wage premia, especially for skilled workers. This relationship is better approximated as linear rather than binary in contrast to previous literature.

Cagatay Bircan


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