Foreign Ownership and Wages: Evidence from Hungary, 1986-2008

Abstract

This paper estimates the wage effects of foreign direct investment (FDI) with firm-level and linked employer-employee panel data containing a large number of foreign acquisitions over a long period of rapid development in Hungary. Matching on pre-acquisition data, the paper finds that much of the raw foreign wage premium represents selection bias but that foreign acquisition nevertheless raises average wages 15-29% when controlling for fixed effects for firms and highly detailed worker groups, and 6% with firm-worker match effects. Acquired firms that are later divested to domestic owners experience a substantial reversal of the acquisition effect. No type of worker – defined by education, experience, gender, incumbency, and occupational group – experiences wage decline, but the patterns suggest skill bias in the gains from acquisition. The evidence implies a strong cross-firm correlation of FDI wage and productivity differentials, and an inverse relationship between FDI effects and level of economic development.

Keywords: foreign acquisitions, FDI, earnings, wage differentials, productivity, difference-in differences matching, employer effects, Hungary

JEL Classification: F23, F66, J31