Labour Demand Adjustment: Does Foreign Ownership Matter?
| Date | 01 December 2015 |
| Author | Claude Mathieu,Emmanuel Dhyne,Catherine Fuss |
| Published date | 01 December 2015 |
| DOI | http://doi.org/10.1111/obes.12097 |
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©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 77, 6 (2015) 0305–9049
doi: 10.1111/obes.12097
Labour Demand Adjustment: Does Foreign
Ownership Matter?*
Emmanuel Dhyne†, Catherine Fuss‡§ and Claude Mathieu¶
†Research Department, National Bank of Belgium, and UMons, 14 Boulevard de
Berlaimont 1000, Brussels, Belgium
(e-mail: emmanuel.dhyne@nbb.be)
‡Research Department, National Bank of Belgium, and Universit´e Libre de Bruxelles, 14
Boulevard de Berlaimont 1000, Brussels (e-mail: catherine.fuss@nbb.be)
§Universit´e Libre de Bruxelles, Belgium
¶ERUDITE, Universit´e Paris Est Cr´eteil, 61, Avenue du G´en ´eral de Gaulle F-94010,
Cr´eteil, France (e-mail: mathieu@u-pec.fr)
Abstract
This paper examines whether multinationals differ in their employment adjustment from
domestic companies, using a panel of 5,544 Belgian firms observed between 1998 and
2005. More precisely, we estimate labour adjustment costs by worker and firm types. We
propose a new flexible specification that takes into account the role of firm size in adjust-
ment costs. Our results indicate that adjusting white-collar employment is around half as
costly for multinational firms (MNFs) as for domestic firms of the same size. The remain-
ing differential in adjustment costs between MNFs and domestic firms might result, among
other things, from multinationals’ stronger bargaining power.
I. Introduction
Employment is one of the major concerns of policy-makers. Not only does its level matter
but also its fluctuations. Among the many policy measures that help foster and sustain em-
ployment, many governments devote substantial efforts to attract foreign direct investment
(FDI) to their country.1Indeed, due to their large scale, multinational firms (MNFs) may
make a sizeable contribution to employment creation (e.g. through new production plants)
and may also provide a valuable input to value-added activities (e.g. when setting up R&D
*The views expressed in this paper are those of the authors and do not necessarily reflect the viewsof the National
Bank of Belgium. All remaining errors are ours. We would like to thank two anonymous referees and the editor for
their useful comments on previous drafts.
JEL Classification numbers: F23, J23
1These may include fiscal stabilization measures such as rulings. For instance, multinationals’ financial centres,
known as coordination centres, received favourable tax treatment in Belgium up to 2010. In addition, government
investment in infrastructure, as a complement to inward FDI, and subsidies may represent significant incentivesfor
foreign investors (Haskel, Perreira and Slaughter, 2007, report examples of subsidies in the United States and the
United Kingdom).
Labour demand adjustment 855
centres). In Belgium, between 2003 and 2008, around 10,000 jobs were directly created
each year by FDI (IBM, 2009). MNFs account for 39% of employment and 26% of net
job creation although they represent only 2% of the registered companies over 1999–2007,
according to firm-level data available at the National Bank of Belgium.
Furthermore, MNFs have played a growing role in the world economy over the last
few decades, partly due to the globalization of markets and the development of global
production chains. Based on inward FDI flows expressed as a percentage of gross capital
formation, Belgium (64%) ranks at the top among European Union countries (16%), and
way ahead of the United States (6%) (UNCTAD, 2009).
Although MNFs are expected to generate large employmentbenefits, they also generate
fear of employment instability. This implies that job creations by MNFs in good times
are counterbalanced by the risk of heavy job losses in the event of adverse economic
conditions. Indeed, as shown in Figure 1 below, at the aggregate level, MNFs induce more
job destruction during downturns. Furthermore, the coefficient of variation in firm-level
employment changes is four to five times larger for MNFs than for domestic firms.
MNFs are commonly viewed as being more flexible in terms of employment and plant
management. Owing to their international experience, production network and lowbar riers
to international mobility, MNFs can more easily reduce their activities on a local market,
and relocate part or all of them to another country where labour costs are lower,productivity
is higher and/or demand is increasing strongly.
With respect to plant dynamics, extensiveliterature has focused on the footloose nature
of multinationals, and highlighted the fact that MNFs have a higher propensity to close
plants and exit the domestic market than national firms with comparable characteristics
(see, e.g. Bernard and Sj¨oholm, 2003; G ¨org and Strobl, 2003; Bernard and Jensen, 2007;
Alvarez and G¨org, 2009; and, for Belgium, Van Beveren, 2007; Blanchard et al., 2012).
Firm exit is an abrupt and definitive event that may imply massive job losses. Still it is a
relatively rare event.
The most common case is that firms pursue their economic activity, expand or de-
crease their scale, according to changes in demand and business conditions. Surprisingly,
few studies have investigated the employment decision of MNFs that remain in activity
and especially the impact of the MNF status on the labour adjustment policy in the affili-
-20
-10
0
10
20
30
40
50
60
70
80
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
domestic firms MNFs
Figure 1. Total net employmentcreation by domestic firms and MNFs (in thousands of employees in full time
equivalent)
Source: NBB Survey on Foreign Direct Investmentand annual accounts.
©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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