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Foreign direct investment and wages in domestic firms in Ireland: Productivity spillovers versus labour-market crowding out

  • Frank Barry
  • Holger Gorg
  • Eric Strobl

There is a large literature on the positive spillovers frequently thought to be associated with inward foreign direct investment. Aitken et al. (1996) identify several cases, however, where inward FDI appears to have reduced wages in domestic firms. They suggest that this might arise either because foreign firms increase the degree of product-market competition that domestic firms face, or because they poach the best workers from domestic firms. We concentrate on the second effect, arguing that the first is unlikely to arise in the Irish case to which our data pertain. In a theoretical section we show that the labour-market poaching effect cannot generate the results postulated if labour markets are competitive and production functions are of the Cobb-Douglas variety, but that it can arise if production functions display higher elasticities of substitution. In an empirical section based on a sample of larger Irish firms we show that, consistent with our theoretical model, foreign presence has different effects on wages and productivity in domestic exporting and non-exporting establishments.

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Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 12 (2005)
Issue (Month): 1 ()
Pages: 67-84

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Handle: RePEc:taf:ijecbs:v:12:y:2005:i:1:p:67-84
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  12. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
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  17. Kevin Denny & Machin, S, 1991. "The role of profitability and industrial wages in firm level wage determination," Fiscal Studies, Institute for Fiscal Studies, vol. 12(2), pages 34-45, May.
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  23. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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