Why Do Foreign-Owned Firms Pay More? The Role of On-the-Job Training

Abstract

While foreign-owned firms have consistently been found to pay higher wages than domestic firms to what appear to be equally productive workers, the causes of this remain unresolved. In a two-period bargaining framework we show that if training is more productive and specific in foreign firms, foreign firm workers will have a steeper wage profile and thus acquire a premium over time. Using a rich employer-employee matched data set we verify that the foreign wage premium is only acquired by workers over time spent in the firm and only by those that receive on-the-job training, thus providing empirical support for a firm-specific human capital acquisition explanation.

References

  1. 1.

    Acemoglu, D., and J. Pischke (1999). The Structure of Wages and Investment in General Training. Journal of Political Economy 107 (3): 539–572.

    Google Scholar 

  2. 2.

    Aitken, B., A. Harrison, and R. Lipsey (1996). Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela, and the United States. Journal of International Economics 40 (3): 345–371.

    Google Scholar 

  3. 3.

    Barron, J., M. Berger, and D. Black (1999). Replacing General with Specific Training: Why Restricting Alternatives Makes Sense. In S. Polachek and J. Robst (eds.), Research in Labor Economics. Amsterdam: JAI.

  4. 4.

    Becker, G. (1993). Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education. Third edition. Chicago: Chicago University Press.

  5. 5.

    Budd, J. W., and J. Konings (2005). International Profit Sharing in Multinational Firms. Review of Economics and Statistics 87 (1): 73–84.

    Google Scholar 

  6. 6.

    Caves, R. (1996). Multinational Enterprise and Economic Analysis. Second Edition. Cambridge: Cambridge University Press.

  7. 7.

    Feliciano, Z., and R. Lipsey (2006). Foreign Ownership, Wages, and Wage Changes in U.S. Industries, 1987–92. Contemporary Economic Policy 24 (1): 74–91.

    Google Scholar 

  8. 8.

    Fosfuri, A., M. Motta, and T. Ronde (2001). Foreign Direct Investment and Spillovers Through Workers’ Mobility. Journal of International Economics 53 (1): 205–222.

    Google Scholar 

  9. 9.

    Globerman, S., J. Ries, and I. Vertinsky (1994). The Economic Performance of Foreign Affiliates in Canada. Canadian Journal of Economics 27 (1): 143–156

    Google Scholar 

  10. 10.

    Görg, H., and E. Strobl (2005). Spillovers from Foreign Firms through Worker Mobility: An Empirical Investigation. Scandinavian Journal of Economics 107 (4): 693–709.

    Google Scholar 

  11. 11.

    Griffith, R., and H. Simpson (2004). Characteristics of Foreign-Owned Firms in British Manufacturing. In R. Blundell, D. Card, and R. Freeman (eds.), Creating a Premier League Economy. Chicago: Chicago University Press.

  12. 12.

    Hashimoto, M. (1981). Firm Specific Human Capital as a Shared Investment. American Economic Review 71 (3): 475–482.

    Google Scholar 

  13. 13.

    Keller, W. (1996). Absorptive Capacity: Understanding the Creation and Acquisition of Technology in Development. Journal of Development Economics 49 (1): 199–227.

    Google Scholar 

  14. 14.

    Lim, D. (1977). Do Foreign Companies Pay Higher Wages Than Their Local Counterparts in Malaysian Manufacturing? Journal of Development Economics 4 (1): 55–66.

    Google Scholar 

  15. 15.

    Lipsey, R., and F. Sjöholm (2004). Foreign Direct Investment, Education and Wages in Indonesian Manufacturing. Journal of Development Economics 73 (1): 415–422.

    Google Scholar 

  16. 16.

    Malcolmson, J. (1999). Individual Employment Contracts. In O. Ashenfelter and D. Card (eds.), Handbook of Labor Economics. Volume 3B. Amsterdam: Elsevier Science.

  17. 17.

    Strobl, E., and R. Thornton (2004). Do Large Employers Pay More in Developing Countries? The Case of Five African Countries. Journal of Economic Development 29 (1): 139–161.

    Google Scholar 

  18. 18.

    Sutton, J. (1986). Non-Cooperative Bargaining Theory: An Introduction. Review of Economic Studies 53 (5): 709–724.

  19. 19.

    Velde, D. te, and O. Morrissey (2003). Foreign Ownership and Wages: Evidence from Five African Countries. Journal of African Economies 12 (1): 41–73.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Eric Strobl.

Additional information

JEL no.

F23, J24

About this article

Cite this article

Görg, H., Strobl, E. & Walsh, F. Why Do Foreign-Owned Firms Pay More? The Role of On-the-Job Training. Rev World Econ 143, 464–482 (2007). https://doi.org/10.1007/s10290-007-0117-9

Download citation

Keywords

  • On-the-job training
  • foreign-owned firms
  • wages