![]() ![]() It shows that foreign takeovers raise average wages in the short-term, particularly in emerging economies. 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.įigure 1 presents new evidence on the effects of foreign takeovers on average wages within firms for two emerging economies (Brazil and Indonesia) and three OECD countries (Germany, Portugal and the United Kingdom). 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. 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. New evidence on the effects of inward FDI for workersĭo foreign multinationals pay higher wages than domestic firms? Simple comparisons suggest they do. The difference may be interpreted as the contribution of MNEs to improving wages and working conditions in the host country as employment conditions in comparable domestic firms provide a plausible approximation (“counterfactual”) of the conditions that would have been offered to individuals had they not been able to work for MNEs (directly or indirectly). This involves comparing the wages and working conditions of employees in the foreign affiliates of MNEs and their supplier firms to the wages and working conditions that they would have received had they not been employed by a foreign firm or one of its suppliers. New work by the OECD (2008a) adopts a “local standard” to evaluate the social impact of FDI in the host country. In many OECD countries, civil society has appealed to multinational enterprises to ensure that internationally recognised labour norms are respected throughout their foreign operations. In some cases, MNEs have also been accused of violating human and labour rights in developing countries where governments fail to enforce such rights effectively (“universal standard”). For example, MNEs have been accused of practicing unfair competition when taking advantage of low wages and labour standards abroad (“home-country standard”). The nature of these concerns depends on the normative standard that is used to judge how MNEs treat their workers abroad. However, the activities of multinational enterprises abroad have also aroused much controversy and many social concerns. For example, MNEs sometimes provide technical and training support to local firms incorporated into their supply chains. Multinational enterprises may also stimulate local firms to improve wages and working conditions indirectly. Such firms can do this directly, offering better wages and working conditions to their employees than those offered by local firms. Through the introduction of modern production and management techniques, multinational enterprises may raise productivity in the host country and thereby promote better wages and working conditions. The increased role of FDI in developing and emerging economies has raised expectations about its potential to contribute to their development. Indeed, since the mid-1990s, foreign direct investment has become the single biggest source of external finance for developing countries and is currently more than twice as large as official development aid. Today, developing countries account for almost one-third of the global stock of inward foreign direct investment, compared to slightly more than one-fifth in 1990. The increased influence of OECD-based MNEs in developing countries is particularly striking. During the past fifteen years, the total stock of foreign direct investment (FDI) increased from 8% of world GDP in 1990 to 26% in 2006 ( UNCTAD, 2007). Multinational enterprises (MNEs) have become one of the key drivers of the world economy, and their importance continues to grow around the world. ![]()
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