1/2014 Jaanika Meriküll and Tairi Rõõm. Are foreign-owned firms different? Comparison of employment volatility and elasticity of labour demand

Working Papers of Eesti Pank 1/2014

Published in ECB Working paper series, No 1704/August 2014

This paper analyses differences in employment volatility in foreign-owned and domestic companies using firm-level data from 24 European countries. The presence of foreign-owned companies may lead to higher employment volatility because subsidiaries of multinational companies react more sensitively to changes in labour demand in host countries or because they are more exposed to external shocks. We assess the conditional employment volatility of firms with foreign and domestic owners using propensity score matching and find that it is higher in foreignowned firms in about half of the countries that our study covers. In addition, we explore how and why labour demand elasticity differs between these two groups of companies. Our estimations indicate that labour demand can be either more or less elastic in subsidiaries of foreign-owned multinationals than in domestic enterprises, depending on the institutional environments of their home and host countries. When FDI originates from a region with a more flexible institutional environment then the elasticity of labour demand is smaller in absolute value in foreign-owned firms. In the opposite case the elasticity of labour demand is higher. A potential explanation for this empirical finding is that it is easier for multinational companies to substitute between factor inputs and therefore they have more flexibility than domestic firms in choosing which channels of adjustment to use.

JEL Codes: F23, J23, J51

Keywords: foreign direct investment (FDI), employment volatility, labour demand, labour market institutions, European Union

Authors' e-mail addresses: jaanika.merikyll [at] eestipank.eetairi.room [at] eestipank.ee.

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The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.