Working conditions in the foreign operations of multinational enterprises

One of the many thing some people dislike about multinational enterprises are their foreign labour practices. But what is the evidence on this issue? In a column at VoxEU.org, Alexander Hijzen (Employment Analysis and Policy Division of the OECD) presents new evidence on how foreign takeovers affect workers’ wages and non-wage working conditions. The basic result is that foreign investment is worth encouraging.

Hijzen's column is Working conditions in the foreign operations of multinational enterprises. The column is based on OECD (2008).

Hijzen points out that

... OECD (2008a) adopts a “local standard” to evaluate the social impact of FDI in the host country. 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. 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).

An often asked question to do with MNES is, Do foreign multinationals pay higher wages than domestic firms? Hijzen writes

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.

Hijzen looks at 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). He explains

It shows that foreign takeovers raise average wages in the short-term, particularly in emerging economies. Wages rose between 10% and 20% following foreign takeovers in Brazil and Indonesia, and between 0% and 10% in the three OECD countries. While these figures show the effect on average wages, they do not tell how the change is distributed across workers within firms and, particularly, whether the increase in average wages reflects wage gains for incumbent workers or instead changes in the skill composition of the workforce. To the extent that foreign takeovers lead to skill upgrading, the evidence overestimates the positive effects of takeovers on individual wages.

Hejzen than looks at the effects of foreign ownership on individual workers.

Foreign takeovers of domestic firms have a small positive effect on the wages of existing workers in Brazil, Germany and Portugal in the short-term, ranging from 1% to 4% and no effect in the United Kingdom. While the short-term impact of takeovers on incumbent workers is modest, the role of foreign ownership is more substantial for new hires. This is indicated by the relatively large wage gains of workers who move from domestic to foreign firms. They range from 6% in the United Kingdom to 8% in Germany, 14% in Portugal and 21% in Brazil. The differential effect of foreign ownership on incumbent workers and new hires may reflect more competitive conditions in the market for new hires that allow new employees to more widely share the productivity advantages of MNEs. In the longer term, however, one would expect the positive effects to spread across the entire workforce, as large pay disparities between new and old workers within firms are unlikely to be sustainable.

Whether multinational enterprises also promote improvements in other aspects of workers’ employment conditions, such as training, working hours and job stability, is a more complex question, and the existing evidence is scarce. Studies that have looked into this issue suggest that MNEs have a low propensity to export non-wage working conditions abroad. New analysis by the OECD suggests that, in contrast to wages, non‑wage working conditions do not necessarily improve following a foreign takeover. Even when they do, it is not clear whether these effects derive from a centralised policy to maintain high labour standards or merely reflect the optimal responses by MNEs to local conditions.

In addition to having direct effects on workers, FDI may also have indirect effects on workers’ employment conditions in domestic firms when there are knowledge spillovers associated with FDI. The effect on workers in domestic firms, however, is considerably weaker than the direct effect on employees of foreign affiliates of MNEs. While it is true that FDI typically has a strong effect on average wages in local firms, this largely reflects the competition between foreign and domestic firms for local workers. Positive productivity-driven wage spillovers do not necessarily arise. They are likely to be more important when there are strong links between local firms and foreign MNEs, such as through the participation of local firms in the supply chain or through worker mobility.

In summary Hijzen says

The potential of multinational enterprises to contribute to economic development in host countries provides a case for encouraging inward foreign direct investment. For a start, removing specific regulatory obstacles to inward FDI could be important. Under certain circumstances, it may also be appropriate to provide specific incentives to potential foreign investors. Such targeted policies should not, however, become a substitute for policies aimed at improving the business environment more generally. By contrast, lowering core labour standards in an effort to provide a more competitive environment for potential investors is likely to be counter-productive. It does not appear to be effective in attracting FDI and is likely to discourage investment from responsible MNEs, anxious to ensure that minimum labour standards are respected throughout their operations.

• OECD (2008), “Do Multinationals Promote Better Pay and Working Conditions?”, OECD Employment Outlook, Paris.