DP6292 Foreign Firms, Domestic Wages

Author(s): Nikolaj Malchow-Møller , James R. Markusen , Bertel Schjerning

Publication Date: May 2007

Keyword(s): heterogeneous firms , knowledge transfer , multinationals , productivity , spillovers

JEL(s): F16 , F2 , F23

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP6292.asp.asp

Foreign-owned firms are often hypothesized to generate productivity “spillovers” to the host country, but both theoretical micro-foundations and empirical evidence for this are limited. We develop a heterogeneous-firm model in which ex-ante identical workers learn from their employers in proportion to the firm’s productivity. Foreign-owned firms have, on average, higher productivity in equilibrium due to entry costs, which means that low-productivity foreign firms cannot enter. Foreign firms have higher wage growth and, with some exceptions, pay higher average wages, but not when compared to similarly large domestic firms. The empirical implications of the model are tested on matched employer-employee data from Denmark. Consistent with the theory, we find considerable evidence of higher wages and wage growth in large and/or foreign-owned firms. These effects survive controlling for individual characteristics, but, as expected, are reduced significantly when controlling for unobservable firm heterogeneity. Furthermore, acquired skills in foreign-owned and large firms appear to be transferable to both subsequent wage work and self-employment.