Multinational Investment, Government Policy and the Labour Market
In our globalized economy, national governments lower corporate taxes and institutional barriers to convince multinational firms to invest in their economy. The debate on such policies is intensifying in the Netherlands and across Europe. Yet, exact insights in the impact of such policies on the location choices of multinational enterprises and the extent of job creation by those firms is scarce. The project “Multinational Investment, Government Policy and the Labour Market” aims to fill this gap.
By researching the locational decisions of multinational enterprises (MNEs) at Dutch and European regional levels, this project aims to identify the impact of government policies on the location choices of MNEs and their corresponding impact on local labour markets. Greenfield as well as merger and acquisition (M&A) investments may positively contribute to job creation by recruiting from local labour markets. Furthermore, local high skilled labour may flourish in new MNE affiliates or in related subcontracting firms and lower skilled labour in servicing occupations like security, catering and cleaning (trickle-down effect of MNE investment). However, substantial negative crowding out effects may also arise when MNE activities compete with local businesses, or hire their best employees. In addition, the employment impacts are expected to vary by sector and business activity, an issue still unexplored. Overall, the precise job creation outcomes of MNE investment in local labour markets are still unclear. Moreover, tax regimes vary dramatically across European countries and regions, suggesting that an evaluation of the entire policy design (and its interactions with MNEs’ different location choices) is required to identify the effectiveness and employment impacts of MNE-attracting policies, rather than just corporate tax rate. Focusing on these questions, this project aims to contribute to urban and regional economic, economic-geographical and public economic debates on the societal impacts of MNEs.
Foreign direct investment (FDI)
Virtually all countries in the world have developed policies to attract multinational firms (MNEs), seeking their purported benefits. One the most anticipated benefits that is of particular interest for governments is the extent to which foreign investments create new and – preferably – high quality jobs. The existing literature on this topic addresses several channels through which MNE investment might have positive and/or negative effects on local labour markets, yet identification of the magnitudes of these effects and the exact impact of FDI-attracting policies remains ambiguous.
Firstly, there is ample evidence that foreign affiliates have a productivity advantage over domestic ones, thus enhancing the aggregate productivity of the local labour force (e.g. Javorcik, 2004; Girma and Görg, 2007). Secondly, there has been a search for positive local knowledge spillovers from foreign investment, either associated with labour mobility from the foreign affiliate to domestic firms or to newly established businesses (e.g. Balsvik, 2011). Thirdly, there is a burgeoning interest in the relationship between MNE investment, wages and employment composition (Huttunen, 2005; Almeida, 2007; Heyman, Sjöholm and Tingvall, 2007). Interestingly, the literature is relatively silent about MNE investment and the relationship with host country job creation and the indirect trickle-down effects on local employment. This is particularly interesting as in recent years, governments across the developed world have increasingly used anticipated job creation associated with MNE investment as a justification of drastic policy choices, mainly regarding tax reductions, for attracting MNE investment.
However, MNE investment also comes with several downsides to local labour markets in the host country. For instance, when competitive international firms crowd out – investments of – less competitive domestic firms, causing job losses (c.f. Borensztein et al., 1998). Similarly, because MNEs generally pay higher wages, these foreign affiliates are highly attractive for local high-skilled workers, which decrease the liquidity of the local labour pool for domestic firms or the public sector. Consequently, productivity and firm growth are hampered potentially leading to less created jobs. Consequently, such negative implications make the net impact of MNE investment on job creation highly uncertain and, in light of the recent policy debates on taxation in the Netherlands and across Europe, even more important to address: it is by no means clear that policies aimed at reducing corporate tax levels have a positive effect on job creation through MNE investment.
Given that the evidence on direct and indirect job creation of MNE investment is scarce, this project is aimed at providing answers to some of the most apparent questions on this academically and societally relevant topic. To do so, we subdivide our arguments over three interrelated questions and corresponding research endeavours:
- What is the impact of the location choices of MNEs on job creation in local labour markets?
a. How many jobs do MNE investments create and how does the impact vary across sectors and business activities?
b. What are the trickle-down effects of MNE investments across sectors and business activities, such as R&D, headquarters, or manufacturing?
- What government policies attract MNE investment?
- How does the host country context -- in terms of institutions, geography, position in the trade and knowledge networks, and the choices of complementary policies, like economic zones or innovation policy – interact with the effectiveness of tax policies that aim to attract MNE investment?
Ad. 1. Spillovers in terms of job creation result from multiplier effects of MNEs investing in host countries, either by greenfield investments or by mergers and acquisitions (M&A). Notwithstanding crowding out effects and the transfer of home country personnel, greenfield investments are expected to create new jobs while M&A benefits in employment sourcing are less clear. Both greenfield and M&A investments in principle trigger local multiplier effects, from subcontracting relations and, servicing industries, both in high-end knowledge intensive business services that serve local markets (Jacobs et al. 2014) and in personal services like catering, security and cleaning (Moretti 2012). The extent to which MNEs hire local expertise relevant for their internal organisation differs by sector and business activity of the investment, and this heterogeneity should be addressed (an issue overlooked in the literature).
Ad 1a. The fact that not all value-added activities of MNEs are equally footloose has important implications for policies aimed at attracting MNE investment and enhancing employment. Not all MNE affiliates are alike, for instance they include independent subsidiaries, production plants, and headquarters. While much of the political debate revolves around the establishment of headquarters, it is not clear whether headquarter locations have more or less local impacts than other parts of the firm. In fact, production plants may demand medium-skilled, unspecialized workers, whereas headquarter services demand highly specialized, differentiated workers.
Ad. 1b. A related issue that deserves attention is the trickle-down effect. MNE s are typically the most productive, most skill-intensive firms. They pay higher wages and manage to attract the most talented workers, so their direct employment impacts may be at the top of the labour market. However, MNEs might also generate employment at the lower end of the labour market indirectly, by bringing more business and demand for local services and real estate. Consequently, the regional employment impacts may be highly differentiated across relatedness to the firm, education and skills levels, and geography.
Ad. 2. Regarding government policies, much of the current debate and recent research is directed to the impact of taxation on MNE location choice (e.g. Devereux and Griffith, 1998; Barrios et al., 2012). The main findings of these studies are that taxation has a negative effect on the location of foreign subsidiaries. However, recent research increasingly recognizes that MNEs’ organisation choices, such as slicing up their value chain or relocating their less tangible assets, make the impact of taxes highly heterogenous (Egger et al., 2013; Clausing, 2018). Some parts of the value chain are less footloose than others. For instance, MNEs are typically part of (geographical) production networks that emerge at specific locations with unique local attributes. These attributes, such as the size of the local economy, research facilities or the local stock of human capital might explain far more variation in MNEs’ location decisions than taxes do. Moreover, these factors imply that competition for investment is restricted to a set of places offering similar opportunities, apart from the tax conditions. In turn, such locational attributes can be leveraged to set higher tax rates, without firms fleeing the location. MNEs’ sensitivity to taxation is thus likely to be conditional on the type of investment and locational factors specifically relevant to that type of investment. To provide a stylized example: locations with high human capital may compete over headquarter services with lower corporate tax rates, whereas location with lower human capital are more likely to compete on labour conditions.
Ad. 3. Identification of the effectiveness of government policies on attraction of FDI and its impact on employment (both high-skilled and lower-skilled) needs a set-up of research that isolates the effects of portfolios of policies across nation states, which all have different institutional and legal embeddings. Tax policies are important, but labour legislation, cluster policies and other formal and informal institutions that impact location decisions of MNE’s vary as well. In particular, economic theories with a geographical and organisational dimension suggest that the institutional context and precise policy instrument choice interact substantially with the MNE-local employment nexus. Question 3 reflects that the combination of these insights is at the empirical core of this project.
The first project focuses on employment impacts of MNEs in the Netherlands. It leans heavily microdata on international investment and employment, drawing on a cooperation with CBS. Connecting individual and establishment-level data allows a more complete picture of the employment dynamics and heterogeneous impacts (for a seminal example, see Glaeser and Maré, 2001). The second project has a more international focus, aiming to connect comparable datasets from several other European countries. The third project focuses on identification using tax and policy data across locations, and estimating multinational investment responses for individual investment decisions.
The three subprojects are innovative since no systematic research has looked at these issues previously, and they combine economic insights with regional-, industrial-, and fiscal-economic elements.
- Almeida, R. (2007) The labor market effects of foreign owned firms. Journal of International Economics, 72(1): 75-96.
- Balsvik, R. (2011) Is labor mobility a channel for spillovers from multinationals? Evidence from Norwegian manufacturing. Review of Economics and Statistics, 93(1): 285-97.
- Barrios, S. Huizinga, H., Laeven, L. and Nicodème, G. (2012) International taxation and multinational firm location decisions. Journal of Public Economics, 96(11-12): 946-958.
- Borensztein, E., De Gregorio, J. and Lee, J-W. (1998) How does foreign direct investment affect economic growth? Journal of international Economics, 45(1): 115-135.
- Clausing, K.A. (2018) Does tax drive the headquarters locations of the world’s biggest companies? Transnational Corporations, 25(2): 37-66.
- Devereux, M.P. and Griffith, R. (1998) Taxes and the location of production: evidence from a panel of US multinationals. Journal of Public Economics, 68(3): 335-367.
- Egger, P., Radulescu, D. and Strecker, N. (2013) Effective labor taxation and the international location of headquarters. International Tax and Public Finance, 20(4): 631-652.
- Girma, S. and Görg, H. (2007) Multinationals’ productivity advantage: Scale or technology?, Economic Inquiry, 45(2): 350-62.
- Glaeser, E. & D.C. Maré (2001) Cities and skills. Journal of Labour Economics, 19(2): 316-342.
- Heyman, F., Sjöholm, F. and Tingvall, P. (2007) Is there really a foreign ownership wage premium? Evidence from matched employer-employee data. Journal of International Economics, 73(2): 355-76.
- Huttunen, K. (2007) The Effect of Foreign Acquisition on Employment and Wages: Evidence from Finnish Establishments. Review of Economics and Statistics, 89(3): 497-509
- Jacobs, W., Koster, H. and Van Oort, F.G. (2014) Co-agglomeration of knowledge-intensive business services and multinational enterprises. Journal of Economic Geography 14: 443-47.
- Javorcik, B.S. (2004) Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review, 94(3): 605-27.
- Karreman, B., Burger, M.J. and Van Oort, F.G. (2017) Location choices of Chinese multinationals in Europe: The role of overseas communities. Economic Geography, 93(2): 131-161.
- Moretti, E. (2012) The New Geography of Jobs. New York: Marinier Books.
- Tilburg University, Prof. Daniel Smit.
- CPB, dr. Marcel van den Berg.
Cooperation with several high-profile foreign researchers is envisioned.
Two strands of literature shape this research project. On the one hand there is the burgeoning literature on the impact of taxation on the location choices of MNEs. On the other hand, there is the gradually advancing literature on the alleged positive effects of MNE investment for local businesses and labour markets. Interestingly, both strands of literature touch upon the issue of job creation in local labour markets, either implicitly – taxation and location choice – or explicitly – local impact of MNE investment –. What is clearly overlooked in both literatures are however, the net effects of MNE investment on job creation and job quality, i.e. taking into account both the positive and negative effects of MNE investment and MNE-level heterogeneity on the local labour market. This is of essential importance in this debate because policymakers are increasingly using the argument of job creation to implement policies to attract MNE investment, even though that the net effects of MNE investment on the local labour market are still unclear.
Unravelling the complexity of the research topic requires a multidisciplinary theoretical approach, combining international economic approaches, microeconomic insights of firm behaviour and regional dynamics. Empirically, the research focuses on identification and disentangling of firm-level effects and regional-level effects in labour market outcomes. The combination of theoretically informed research, rigorous empirical testing using micro-data in combination with regional data, and policy relevant interpretation makes this research not only very interesting but also of clear academic relevance.
Publications following from this project are primarily aimed at general interest journals. In terms of field journals, the project connects to literature in journals such as the Journal of Public Economics or the Journal of Economic Geography.
Across developed countries and particularly in pre-Brexit Europe, a debate is souring about the use of taxation policies to increase country attractiveness for MNE investment. Politicians commonly argue that lower corporate taxes might initially decrease tax revenues, but will also attract more firms, eventually generating renewed tax revenues through direct job creation and trickle-down effects. In the Netherlands, the current debate about the dividend tax is exemplary. While the literature indicates that there are positive effects on job creation of MNE investment, the negative effects are also highlighted: crowding out effects on the local labour market might also offset the jobs created. Hence, the overall effects of public policies to attract MNE investment on job creation are highly uncertain.
The societal contribution of this project lies in this debate. As evidence on the (contextual) effectiveness of different tax policies is lacking, and the direct and indirect employment consequences of MNE investment have not been weighted against each other empirically, many arguments both in favour and against tax cuts go unsubstantiated in the debate. This is unfortunate as the losses of public funds are considerable – approximately 1.9 billion euro’s a year just for the Netherlands – while the public controversy is evident. To provide guidance in this debate it is essential that we understand how policy interventions to attract MNE investment affect local labour markets.
Given the public relevance of the project, some of the results are preferably dissimated via more popular outlets, such as the ESB or Dutch newspapers.
PhD candidate profile
• Urban and Regional Economics
• International Economics
• Quantitative research skills
• Affinity with micro-data
Prof. dr. Frank G. van Oort
T: +31 (0)10 4089088
Dr. Bas Karreman
T: +31 (0)10 4089579
Dr. Michiel Gerritse
T: +31 (0)10 4082113
This project is affiliated with the Tinbergen Institute graduate school, applicants for this project need to pass the Tinbergen Institute's admission requirements before they can be considered for a PhD position at Erasmus School of Economics.
Note that the Tinbergen Institute requires valid GRE General Test results from all applicants. More information about the GRE test. Be aware that available seats for this test fill up very fast so book your test well in advance. Please contact the GRE program for specific questions about the GRE test.
Application deadline: 15 January 2019
Apply for this project using our online application form. Please use the project code below to apply for this project.
Tinbergen project code:
TI PhD 2019 ESE FO BK MG