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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.

Suggested Citation

  • Frank Barry & Holger Gorg & Eric Strobl, 2005. "Foreign direct investment and wages in domestic firms in Ireland: Productivity spillovers versus labour-market crowding out," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 12(1), pages 67-84.
  • Handle: RePEc:taf:ijecbs:v:12:y:2005:i:1:p:67-84 DOI: 10.1080/1357151042000323102

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    References listed on IDEAS

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    1. Jože P. Damijan & Mark Knell, 2005. "How Important Is Trade and Foreign Ownership in Closing the Technology Gap? Evidence from Estonia and Slovenia," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(2), pages 271-295, July.
    2. Della Temenggung, 2007. "Productivity Spillovers from Foreign Direct Investment: Indonesian Manufacturing Industry’s Experience 1975-2000," DEGIT Conference Papers c012_048, DEGIT, Dynamics, Economic Growth, and International Trade.
    3. Stephanie Seguino, 2005. "Gender Inequality in a Globalizing World," Economics Working Paper Archive wp_426, Levy Economics Institute.
    4. Seguino, Stephanie, 2007. "Is more mobility good?: Firm mobility and the low wage-low productivity trap," Structural Change and Economic Dynamics, Elsevier, vol. 18(1), pages 27-51, March.
    5. Rosanna Pittiglio & Filippo Reganati & Edgardo Sica, 2015. "Do Multinational Enterprises Push up the Wages of Domestic Firms in the Italian Manufacturing Sector?," Manchester School, University of Manchester, vol. 83(3), pages 346-378, June.
    6. Livanis, Grigorios & Lamin, Anna, 2016. "Knowledge, Proximity and R&D Exodus," Research Policy, Elsevier, vol. 45(1), pages 8-26.
    7. Saglam, Bahar Bayraktar & Sayek, Selin, 2011. "MNEs and wages: The role of productivity spillovers and imperfect labor markets," Economic Modelling, Elsevier, vol. 28(6), pages 2736-2742.
    8. repec:eee:jrpoli:v:52:y:2017:i:c:p:320-326 is not listed on IDEAS
    9. Pradeep Kumar Keshari, 2011. "Efficiency Spillovers from FDI in the Indian Machinery Industry: A Firm Level Study Using Panel Data Models," Working Papers id:4195, eSocialSciences.
    10. Suyanto & Salim, Ruhul A. & Bloch, Harry, 2009. "Does Foreign Direct Investment Lead to Productivity Spillovers? Firm Level Evidence from Indonesia," World Development, Elsevier, vol. 37(12), pages 1861-1876, December.
    11. Karpaty, Patrik & Lundberg, Lars, 2004. "Foreign Direct Investment and Productivity Spillovers in Swedish Manufacturing," Working Paper Series 194, Trade Union Institute for Economic Research.
    12. repec:gam:jecomi:v:5:y:2017:i:4:p:36-:d:113052 is not listed on IDEAS
    13. Onaran, Ozlem & Stockhammer, Engelbert, 2008. "The effect of FDI and foreign trade on wages in the Central and Eastern European Countries in the post-transition era: A sectoral analysis for the manufacturing industry," Structural Change and Economic Dynamics, Elsevier, vol. 19(1), pages 66-80, March.
    14. Fortanier, Fabienne & van Wijk, Jeroen, 2010. "Sustainable tourism industry development in sub-Saharan Africa: Consequences of foreign hotels for local employment," International Business Review, Elsevier, vol. 19(2), pages 191-205, April.
    15. Suherna & Weksi Budiaji, 2014. "The Impact of customers' relation quality and sensing on the marketing performance for micro industries development in Banten Province, Indonesia," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 7(1), pages 147-151, June.
    16. CUYVERS, Ludo & SOENG, Reth & PLASMANS, Joseph & VAN DEN BULCKE, Daniël, 2008. "Productivity spillovers from foreign direct investment in the Cambodian manufacturing sector: Evidence from establishment-level data," Working Papers 2008004, University of Antwerp, Faculty of Applied Economics.
    17. Kuzyaeva, Anastasia & Didenko, Alexander, 2014. "Productivity Spillovers in the Russian Federation: The Case of Chemical Market," MPRA Paper 59349, University Library of Munich, Germany.
    18. Seguino, Stephanie, 2006. "The Road to Gender Equality: Global Trends and the Way Forward," MPRA Paper 6510, University Library of Munich, Germany.
    19. Hale, Galina & Xu, Mingzhi, 2016. "FDI effects on the labor market of host countries," Working Paper Series 2016-25, Federal Reserve Bank of San Francisco.
    20. Tulus Tambunnan, 2007. "Trade and Investment Liberalization Effects on SME Development: A Literature Review and a Case Study of Indonesia," Working Papers 4207, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..

    More about this item


    FDI; Spillovers; Labour Market; Crowding Out; JEL Classifications: F23; J23; J31;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials


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