Do Multinational Enterprises Substitute Parent Jobs for Foreign Ones? Evidence from European Firm Level Panel Data

This Paper analyses the demand for labour by home multinational enterprises (MNEs) in Europe. To this end we use a unique firm level panel data set of more than 1,200 European multinational enterprises and their subsidiaries that are located in either the European Union, Central and Eastern Europe or both. We investigate whether employment in the MNEs’ subsidiaries is substitute for home employment – in other words we investigate whether European MNEs can easily relocate employment between the parent companies and their subsidiaries. Our main findings can be summarized as follows: (i) We find evidence for substitution effects between parent and foreign employment. A decline of 10% in MNE affiliate’s wage costs is associated with a decline in parent employment of between 1.5% and 2% on average. (ii) This effect is driven mainly by firms that operate in the manufacturing sector. Moreover, the substitution effects mainly take place between EU parents and their affiliates located within the EU, rather than affiliates located in Central and Eastern Europe. (iii) We also report results for the non-manufacturing firms, where we find no substitution effects between parents and subsidiaries in the service sectors, while we do find positive substitution effects between parents and their affiliates in Central and Eastern Europe for the firms operating in the wholesale trade and construction sectors. Our results suggest that on average the competition from low wage countries in Central and Eastern Europe does not contribute to a relocation of domestic jobs to Central and Eastern Europe. When substitution effects do take place, however, they mainly occur between parent firms and their affiliates that are located in the European Union.