Foreign ownership wage premium: Does financial health matter?

Microeconometric studies have shown that foreign-owned firms pay a wage premium in developing countries. This paper investigates one of the possible channels that explain why foreign firms pay higher wages than their domestic counterparts in developing economies. Under imperfect financial markets, foreign affiliates have a greater access to funds to finance high-technology investments and to compensate their workers. The empirical analysis relies on firm-level data from Romania during the 1998-2006 period. The identification strategy exploits the financial sector reform in Romania during this period as a proxy of an exogenous shock of improvement of financial resources. Changes in the IMF financial reform index across manufacturing industries are related to the ownership status of the firm to investigate how the differential access to finance of foreign firms shapes wages. The findings suggest that a one-standarddeviation increase in the financial reform index increases firms’ wages by 7 percent for domestic firms and 11.2 percent for foreign affiliates. These results are mainly driven by foreign firms from developed countries that might benefit from connections with foreign-owned banks. These findings are stable and robust to different sensitivity tests related to the financial reform indicator, other reforms and industry trends.