Integration, Foreign Direct Investment and Labour Markets: Microeconomic Perspectives

Abstract

Foreign direct investment (FDI) has grown far more rapidly than trade during the last two decades. As with the other prominent features of globalization, FDI is controversial. The impact of FDI on labour markets has been of growing concern, in particular for source countries. The deterioration of labour market conditions for unskilled workers in many OECD countries during the 1980s and 1990s was a primary catalyst for the concern. With regard to its impact on labour markets, FDI may have e¡ects that, at least in the short and medium run, may well dwarf the e¡ects of trade and immigration. In this paper, we review the economic theories and econometric evidence which purport to explain various aspects of the impact of FDI on labour markets. The emphasis is on two partial equilibrium models which, respectively, focus on the location decisions of multinationals and the impact of global ¢rms on collective bargaining outcomes.

Cross-border mergers and domestic-firm wages: Integrating “spillover effects” and “bargaining effects”

“…The presence of these different channels allows for an externality-based spillover effect, as domestic-outsider firms potentially gain productivity (and consequently increase wages) due to inward and outward FDI. Driffield (1996), Gaston and Nelson (2002), and Conyon et al (2002) appear to represent the only scholarship that acknowledges the presence of both effects (bargaining and spillovers) when considering how cross-border mergers influence wages. Yet, Gaston and Nelson (2002) simply review the microeconomics-based approaches to the issue of FDI and labor markets.…”

“…Driffield (1996), Gaston and Nelson (2002), and Conyon et al (2002) appear to represent the only scholarship that acknowledges the presence of both effects (bargaining and spillovers) when considering how cross-border mergers influence wages. Yet, Gaston and Nelson (2002) simply review the microeconomics-based approaches to the issue of FDI and labor markets. Furthermore, Conyon et al (2002) note that an MNE's ability to bargain better with labor represents an indirect effect of foreign-acquisition activity, but go on to concentrate on what they term to be the direct effect: higher productivity and wages (i.e., positive spillovers).…”

“…Second, the spillover-effects literature indicates opposite tendencies, as it is dominated by empirical work and suffers from a lack of formal theoretical work. 1 Third, there has been a lack of dialogue between these two discourses regarding how cross-border mergers might affect wages with only reviews by Driffield (1996), Gaston and Nelson (2002) and Conyon et al (2002) appearing to acknowledge the presence of both mechanisms. While Harrison and McMillan (2011) set conditions which favor when foreign and domestic employment in MNEs are complements and substitutes, we have been unable to detect scholarship that specifically integrates 'spillover' and 'bargaining' effects.…”

Cross-Border Mergers and Domestic Wages: Integrating Positive ‘Spillover’ Effects and Negative ‘Bargaining’ Effects

“…As already noted in the Introduction, Gaston and Nelson (2002) and Conyon et al (2002) appear to represent the only scholarship that acknowledges the presence of both research traditions concerning how cross-border mergers affect wages. It is important to underscore, however, that Gaston and Nelson's (2002) work is a review of the microeconomics-based approaches to the issue of FDI and labor markets.…”

“…For instance, we were only able to identify two scholarly works -Fosfuri, Motta and Rønde (2001); Glass and Saggi (2002) -that formalize the positive spillovers mechanism in our review and reading of the literature. Third, there has been a lack of dialogue between these two discourses regarding how cross-border mergers might affect wages with only reviews by Gaston and Nelson (2002) and Conyon et al (2002) appearing to acknowledge the presence of both mechanisms. This lack of dialogue and interaction is partly due to the different proclivities in the two camps: theoretical tendencies for work on 'bargaining' effects, and empirical tendencies for work on 'spillover' effects.…”