Do Multinational Enterprises Push up the Wages of Domestic Firms in the Italian Manufacturing Sector?

Abstract

This paper investigates the impact of incoming foreign direct investment on local wages in the Italian manufacturing sector. We find that wage spillovers take place mainly when the technological gap between domestically owned firms and foreign‐owned firms is large. Specifically, a large technological distance between domestically owned and foreign‐owned firms has positive effects on wages paid by domestically owned firms in the same industry and negative on domestic wages in upstream and/or in downstream industries. Finally, inward investment may indeed improve the domestic sectors, although such linkage depends on different characteristics of domestically owned firms and sectors where firms operate.

Are local workers better‐off from foreign presence? A firm‐level panel data analysis of a service industry

“…The subsequent upward pressure on domestic firms' wages is more likely to occur if FDI projects are greenfield investments (with substantial labour demand) and the local labour market is highly competitive (with a limited supply of skilled workers). Second, FDI firms with advantageous assets can generate productivity spillovers to domestic firms (Javorcik, 2004;Mastromarco, 2008;Newman, Rand, Talbot, & Tarp, 2015), which in turn may affect local wages (Axarloglou & Pournarakis, 2007;Görg & Greenaway, 2004;Pittiglio, Reganati, & Sica, 2015). Accordingly, positive productivity spillovers may enhance domestic firms' productivity, facilitating higher wages while negative productivity spillovers may force domestic firms to curt production, putting downward pressure on their wages.…”

“…On the one hand, FDI firms are found to exert a positive impact on domestic firms' wages in the USA (Aitken et al, 1996;Axarloglou & Pournarakis, 2007), the UK (Driffield, 1999;Driffield & Girma, 2003;Driffield & Taylor, 2006), Mexico (Villarreal & Sakamoto, 2011), Indonesia (Lipsey & Sjöholm, 2004;Tomohara & Takii, 2011), China (Elliott & Zhou, 2015), India (Chidambaran Iyer, 2012), Thailand (Srithanpong, 2014), and Vietnam (Hoi & Pomfret, 2010). On the other hand, some studies reveal insignificant or even negative wage spillovers from FDI to domestic firms in the case of Ireland (Barry et al, 2005), Spain (Muñoz-Bullón & Sánchez-Bueno, 2013) and Italy (Pittiglio et al, 2015).…”

“…A typical approach in the literature when examining the impact of FDI firms on domestic firms' wages is to regress average wage levels of domestic firms against a measure of foreign presence, controlling for other variables that may affect wages (Axarloglou & Pournarakis, 2007;Hoi & Pomfret, 2010;Lipsey & Sjöholm, 2004). Moreover, constraining the dependent variable (i.e., average wages) to domestic firms can help eliminate potential bias due to foreign wage premium (Aitken et al, 1996;Barry et al, 2005;Pittiglio et al, 2015). Accordingly, an econometric model is specified for estimation as Equation ( 1): where the dependent variable (DW ikjt ) denotes the average wage level of domestic firm i in industry k in region j at time t. It is measured in logarithmic form by total wages (salaries, commissions, bonuses, overtime and vacation pay and other benefits) divided by total workers.…”

“…Previous studies suggest significant roles of firm-specific characteristics in determining wage differences among domestic firms as well as between domestic and FDI firms (Aitken et al, 1996;Brown & Medoff, 2003;Driffield & Girma, 2003;Elliott & Zhou, 2015;Feliciano & Lipsey, 2006;Hoi & Pomfret, 2010;Pittiglio et al, 2015). Hence, a vector of firm level variables is included to control for the impact of firm heterogeneity on firms' average wages.…”

“…Aitken et al (1996) reveal that newly-established firms are more likely to have higher labour productivity levels, allowing them to pay higher. Nevertheless, a larger number of studies suggest that well-established firms tend to be more experienced in both product and labour markets, which may indicate their business success and capability to pay higher wages (Brown & Medoff, 2003;Hoi & Pomfret, 2010;Pittiglio et al, 2015;Villarreal & Sakamoto, 2011).…”