Why Doesn’t Technology Flow From Rich to Poor Countries? An Analysis of Multinational Wage Data

In this paper we ask: why don’t more firms with frontier technologies use them to operate in poor countries, where input costs are presumably lower? Using a database of the salaries paid by multinational firms operating in the capital cities of 149 countries worldwide, we first show that multinationals pay extraordinarily high average salaries in poor countries. In the poorest countries, multinationals’ salaries are on the order of 20 times GDP per worker or 30 times average salaries. The database we use provides salaries by job, where jobs are harmonized to have the same tasks and skill-mix across countries. Multinationals hire mostly skilled, professional workers, which accounts for much of the high pay. We use a model of multinational production choice to derive the implications of this finding. High labor costs rather than (low implied) TFP gaps inhibit multinational production and reduce technology transfer. The skill premium measured through jobs is larger and varies more with development than the skill premium measured through education. Large barriers are needed to rationalize why few workers acquire these valuable skills. We conclude with some suggestions for what these barriers might be.