The Influence of Multinational Companies on the Host Country’s Labor Market
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Publication date: 2005-04-30
GNPJE 2005;199(4):17-35
The article analyses the effects of multinational business operations in a host economy under both rigid and flexible real wages. The analysis covers two sectors, domestic and foreign, and features three factors of production in a small open economy: labor, capital and knowledge. The analysis takes into account three effects of multinational operations: transfer of foreign knowledge and related technological changes, diffusion of know-how among local entrepreneurs and the inflow of foreign capital. Under both rigid and flexible wages, the transfer of foreign knowledge to the international business sector leads to its increased productivity and greater use of factors of production. This results in higher production in foreign companies at the expense of limited employment and production in local companies. On the other hand, the diffusion of foreign knowledge in the host economy and the influx of foreign capital counteract a reduced share of the domestic sector. With rigid real wages, the use of labor in the domestic sector, overall employment and national income either decrease or remain unchanged. In some cases, they grow depending on the effects of knowledge diffusion and foreign capital inflow. Labor benefits remain unchanged, while capital benefits either grow or continue at the same level. Under flexible real wages, the use of labor in the domestic sector decreases, but its overall use in the economy does not change. It always remains at a level equivalent to full employment. National income never shrinks in this case. It depends on the effectiveness of foreign knowledge diffusion among local entrepreneurs. Changes in labor and capital benefits depend on differences in the use of capital per unit of labor between the domestic and international sectors. They also depend on the intensity of foreign knowledge diffusion in the host economy and the inflow of foreign capital.
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