evidence that the long-run demand for labour is more rigid in MNEs’ affiliates. We interpret this result
in the light of the different skill composition of labour demand in multinational firms.
Finally, the cross-country pattern of wage elasticities in national establishments and MNEs’
subsidiaries is put in relation with country-level labour market regulation variables (mainly from OECD
source). We find that while the long-run wage elasticity in foreign-owned plants has very little variation
across countries, country-level characteristics seem to matter for the elasticity in domestic plants. In
particular, the wage elasticity in national plants appears to be less elastic in countries with more
regulated labour markets. We interpret this evidence by referring to the wider set of instruments
available to MNEs to bypass “de-jure” or “de-facto” labour market regulations. This makes MNEs
relatively less affected by country-level measures of labour market rigidity.
The remainder of the paper is organised as follows. In the next section we survey the related
empirical literature. In section 3 we present our empirical estimates, while in section 4 we correlate our
estimates with alternative proxies for adjustment costs. Section 5 concludes.
2. Related literature
A number of papers have analysed the relation of inward FDI with wage levels (among others, Lipsey
(1994), Doms and Jensen (1996), and and Feliciano and Lipsey (1999)). A common finding is that, on
average, MNEs’ subsidiaries in the US pay higher wages when compared with domestically owned
establishments. Lipsey (1994) shows that the wage difference paid by MNEs becomes insignificant after
controlling for firm size, while Feliciano and Lipsey (1999), limiting the analysis to manufacturing
sectors, find that a wage premium in foreign-owned manufacturing establishments remains significant
also after controlling for establishment, industry and state characteristics.5 The usual explanation for
this wage premium paid in MNEs’ subsidiary is a productivity advantage in plants falling under foreign
control (for empirical evidence see, e.g., Davies and Lyons (1991), Doms and Jensen (1998), Griffith
(1999), Girma, Greenaway, and Wakelin (2002), and Benfratello and Sembenelli (2002)).6 Other work
has instead concentrated the focus on the effects of inward FDI on wage inequality. Feenstra and
Hanson (1997) and Aitken, Harrison and Lipsey (1996) show that inward FDI in Mexico have
contributed to raise the wage gap between skilled and unskilled workers significantly. Conversely,
5 Similar results are obtained in Globerman, Ries and Vertinsky (1994) for Canada, in Girma, Greenaway and Wakelin
(2001) for the UK and in Aitken, Harrison and Lipsey (1996), who compare the experience of the US, Mexico and
Venezuela.
6 An alternative explanation maybe higher firm-level profitability for MNEs coupled with international profit sharing (Budd,
Konings and Slaughter (2002)).