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«Chapter Title: Job Creation Abroad and Worker Retention at Home Chapter Author: Sascha O. Becker, Marc-Andreas Muendler Chapter URL: ...»

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This PDF is a selection from a published volume from the National Bureau of

Economic Research

Volume Title: The Analysis of Firms and Employees: Quantitative and

Qualitative Approaches

Volume Author/Editor: Stefan Bender, Julia Lane, Kathryn Shaw, Fredrik

Andersson, and Till von Wachter, editors

Volume Publisher: University of Chicago Press

Volume ISBN: 978-0-226-04287-9; 0-226-04287-1

Volume URL: http://www.nber.org/books/bend08-1

Conference Date: September 29-30, 2006

Publication Date: October 2008 Chapter Title: Job Creation Abroad and Worker Retention at Home Chapter Author: Sascha O. Becker, Marc-Andreas Muendler Chapter URL: http://www.nber.org/chapters/c9120 Chapter pages in book: (309 - 344) Job Creation Abroad and Worker Retention at Home Sascha O. Becker and Marc-Andreas Muendler

10.1 Introduction The employment consequences of multinational enterprises’ global expansions receive substantial public interest. Surprisingly, however, data at the job or worker level are rarely available to investigate this issue more closely. This chapter presents such novel data for Germany and provides evidence on worker separations across industries and firm types—with a particular focus on the distinction between firms that are expanding abroad through ownership of foreign affiliates and those that are not. Contrary to a wide-held perception, both among researchers and in the general public, multinational enterprises offer more stable jobs at home and exhibit lower worker separation rates than their competitors without foreign expansions do. We explore this difference in separation rates by relating it to foreign direct investment (FDI) expansions in Central and Eastern Europe, and worldwide, and by controlling for a rich set of worker, job, homerm, foreign-affiliate, and sector characteristics.

Sascha O. Becker is Reader in Economics at the University of Stirling, UK. Marc-Andreas Muendler is an assistant professor of economics at the University of California, San Diego, and a faculty research fellow at the NBER.

We thank Till von Wachter, Dieter Urban, and participants at the Conference on the Analysis of Firms and Employees in Nuremberg for useful comments and discussions. We thank Heinz Herrmann, Alexander Lipponer, and Fred Ramb for support with BuBa firm data, and Stefan Bender, Iris Koch, and Stephan Heuke for assistance with BA employment records.

Karin Herbst and Thomas Wenger at BuBa kindly shared their string-matching expertise.

Regis Barnichon, Nadine Gröpl, Robert Jäckle, Daniel Klein, and Stefan Schraufstetter provided excellent research assistance at various stages of the project. We gratefully acknowledge financial support from the VolkswagenStiftung under its grant initiative Global Structures and Their Governance, and administrative and financial support from the Ifo Institute.

Becker gratefully acknowledges financial support from the Fritz-Thyssen-Stiftung.

310 Sascha O. Becker and Marc-Andreas Muendler Theory predicts that trade affects labor demand and thus employment stability. Empirical evidence suggests that multinational enterprises (MNEs) channel a large fraction of cross-border trade through their global in-house activities. Multinational enterprises with headquarters in the United States, for instance, transact more than two in five exports and around half of U.S. imports through their affiliates (Zeile 1997). The UN Conference on Trade and Development reports that the world’s ten largest MNEs in 2000 produce almost 1 percent of world gross domestic product (GDP), and that the one hundred largest MNEs are responsible for more than 4 percent of world GDP (up from 31/2 percent in 1990).1 This chapter documents that manufacturing MNEs exhibit 4 percent lower domestic worker separation rates than non-MNEs in manufacturing. Neither worker characteristics nor the MNE’s workforce composition and other observable MNE characteristics, nor sector variables alone can explain the fact that worker retention rates are higher at MNEs: conditional on sector, employer, and worker characteristics, an indicator of an FDI expansion in Central and Eastern Europe (CEE) still predicts 1.6 percentage points lower worker separation rates at MNEs with expansions into CEE, and 1.8 percentage points lower separation rates for expansions anywhere worldwide. To rule out a temporary coincidence of foreign expansions and increased home worker retention rates, or transitory firmlevel shocks that might drive both foreign employment expansions and home worker retentions, we instrument for current foreign expansions with an MNE’s past employment, capital stock, and turnover expansions.

The instrumental-variables estimate for past employment changes raises the predicted reduction in home separation rates to 2.6 percentage points for CEE. This increase in the point estimate is consistent with the ideas that either the foreign expansion itself raises the home-worker retention rate or that an MNE’s permanent gain in competitive advantage raises both foreign expansions and home-worker retentions. Irrespective of the ultimate causal mechanism, which we leave for future research to settle, there is no evidence to blame MNEs for worker separations in the wake of global competition. To the contrary, our estimates are consistent with the prediction that preventing firms from a foreign workforce buildup could be associated with accelerated worker separations from domestic establishments.

Several interpretations are consistent with the finding that workers at MNEs retain their jobs more frequently than workers at non-MNEs. First, vertical foreign expansions that fragment the production process can lead to cost savings, increased world-wide market shares, and domestic employment growth. Second, horizontal expansions that duplicate production at foreign locations can lead to improved market access with potentially beneficial consequences for headquarters employment. Third, complementariUNCTAD press release TAD/INF/PR/47 (12/08/02).

Job Creation Abroad and Worker Retention at Home 311 ties between foreign and home operations can favor higher worker retention rates at MNEs (Harrison, McMillan, and Null 2007). The former three mechanisms emphasize multinational production and sales activities and their potential beneficial impact on home employment. Fourth, the stability afforded by in-house relationships across borders, compared to arm’slength trade, can result in more stable business prospects, so that the choice of contracting mode can reduce worker turnover. Fifth, foreign expansions can signal attractive career paths to domestic workers and reduce worker quits (Prendergast 1999), because an MNE’s foreign investment commits a firm to expansion and thus becomes a device for worker retentions. All five prior mechanisms posit a causal link from foreign expansions to home employment stability. Sixth, a firm’s inherent competitive advantage in product quality or production efficiency can cause foreign expansions and foster home-job retentions. Under this last mechanism, the foreign expansion is not causal to home worker retentions but a consequence of the firm’s competitive success, as are home worker retentions. Irrespective of the causal interpretation under any of the six mechanisms, there is no evidence to suggest that MNEs should be prevented from overseas expansions to save jobs at home. To the contrary, the findings are consistent with the notion that hindering MNEs in their foreign expansion could result in even more domestic job losses to globalization and even stronger downward wage pressure on import-competing jobs.

There are largely three branches of the empirical literature that investigate impacts of global economic integration on domestic labor-market outcomes. A first group of studies analyzes the labor-demand effects of foreign trade, irrespective of the type of employing firm. Feenstra and Hanson (1999), for instance, analyze sector data for the United States and attribute about a third of U.S. relative wage changes to foreign trade and cross-border outsourcing (between or within firms). In related recent work, Geishecker (2006) uses individual household survey data for Germany to study the effect of industry-wide intermediate-goods imports on German workers and finds cross-border outsourcing to significantly reduce individual employment security.2 A second line of research investigates how foreign presence affects labor demands within MNEs. In this literature, Slaughter (2000) does not find foreign wages in MNEs’ foreign locations to significantly affect labor demand at U.S. MNEs’ home operations, and Konings (2004) reports a similarly insignificant relationship between foreign wages and home labor demands for European MNEs. Considering the preponderant role of MNEs in the conduct of foreign trade, these findings stand in surprising contrast to Feenstra and Hanson (1999) or Geishecker (2006). Taken together, they

2. A literature on worker separation is concerned with consequences of worker layoffs (e.g., Jacobson, LaLonde, and Sullivan 1993; Kletzer 2001).

312 Sascha O. Becker and Marc-Andreas Muendler seem to suggest that the labor-market consequences of foreign trade are largely due to between-firm trade rather than within-MNE trade. Other studies find modest substitution between workers in domestic establishments and foreign affiliates (Konings and Murphy 2006; Marin 2006). Hanson, Mataloni, and Slaughter (2005), however, shift the focus from factor demands to intermediate input uses and, as an exception to most prior firm-level evidence, report that affiliates of U.S. MNEs process significantly more intrafirm imports the lower are low-skilled wages abroad. The result challenges the view that foreign locations with a relative abundance in labor fail to attract MNE activity. Harrison, McMillan, and Null (2007) recently report that there is a positive correlation between home employment and foreign-affiliate employment in high-income countries but a negative correlation between home employment and foreign-affiliate employment in developing countries. Integrating foreign location choice (Devereux and Griffith 1998; Head and Mayer 2004) into labor demand estimation, we (Muendler and Becker 2006) discern MNEs’ labor demand responses to foreign wages at the extensive margin, when an MNE establishes its presence at foreign locations, and at the intensive margin, when an MNE operates existing affiliates across locations. This approach shows salient employment adjustments to international wage differences: With a 1 percent increase in German wages, for instance, German MNEs add 2,000 manufacturing jobs in CEE at the extensive margin and 4,000 jobs overall.

A third group of studies, to which the present chapter belongs, too, contrasts MNEs with non-MNEs. Egger and Pfaffermayr (2003) compare domestic capital investments of pure exporters to those of MNEs and do not find a significant difference. Barba Navaretti and Castellani (2004) and Jäckle (2006) assess the effect of first-time FDI on firm performance regarding size and productivity and do not find significant effects of outward FDI on MNE home performance for their respective samples of Italian and German MNEs.

To our knowledge, there is to date no job-level research into the effects of MNE activities using linked employer-employee data. Linked employeremployee data allow us to investigate whether MNEs that expand abroad retain workers more or less frequently than competitors, while controlling for a comprehensive set of worker, job, and employer characteristics. We document a statistically and economically significant positive association between FDI expansions and domestic worker retention rates, for MNEs with no prior foreign presence and for expanding MNEs in CEE and worldwide. Together, the results from prior research on import competition (Feenstra and Hanson 1999; Geishecker 2006), labor substitution within MNEs (Harrison, McMillan, and Null 2007; Muendler and Becker 2006), and the evidence in the present chapter suggest that both intrafirm and cross-firm trade are associated with employment substitution but that MNEs with foreign employment expansions can offer more stable emJob Creation Abroad and Worker Retention at Home 313 ployment in the wake of global competition than non-MNEs. Put differently: global competition likely elevates home-worker separation rates, depending on an employer’s industry to as much as 21 percent, but within industries MNEs manage to reduce these separation rates by four percentage points on average, compared to non-MNEs.

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