Labor share, FDI and Productivity

This paper examines how foreign direct investment affects the labor share through productivity differences between foreign- and domestically owned firms. We develop a search-and-matching model in which more productive foreign firms acquire domestic firms. Foreign ownership raises productivity and wages, but incomplete pass-through of the productivity advantage to workers reduces the labor share. Using European industry-level data, we find that greater foreign employment penetration is associated with lower labor shares and that the foreign productivity premium substantially exceeds the foreign wage premium. Hungarian administrative firm data show the same pattern: foreign-owned firms have higher productivity and labor costs but lower labor shares. Event-study estimates around foreign acquisitions are less precise but are consistent with this mechanism at longer horizons. Our results show how economies with a large foreign-owned sector can combine relatively high wages with relatively low labor shares and highlight persistent foreign–domestic productivity differences as a potential explanation for labor-share differences across Europe.