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Empirica (2010) 37:87100
DOI 10.1007/s10663-009-9112-9
ORIGINAL PAPER
Martin Falk Yvonne Wolfmayr
Published online: 11 August 2009 Springer Science+Business Media, LLC. 2009
Abstract This paper examines the substitution pattern between parent company and foreign afliate employment of European multinationals. The data is drawn from the AMADEUS and BANKSCOPE rm-level databases and covers parent companies in 14 high-wage European countries (EUR14) and their afliated companies in the wider Europe including locations in the low-wage Central and East European countries (CEEC) for the period 20002004. We nd that the substitution elasticity between employment of the EUR14 parent companies and employment in their foreign afliates in the CEEC is quite low. Furthermore, the substitution possibilities are higher between parent company and afliate employment in other West European countries than those between parent company and afliate employment in the CEEC. Finally, we nd that the output change of the parent company and to a lesser extent that of the foreign afliates is more important than changes in relative wages in determining the relative labour demand.
Keywords Multinational enterprises Labour demand Elasticity of substitution
JEL Classication F23 F21 J23
1 Introduction
There is an ongoing debate about the effects of outward FDI into emerging markets on employment in the home countries. Many workers in the former EU-15 countries are worrying about losing their jobs because lower labour costs will induce
M. Falk (&) Y. Wolfmayr
Austrian Institute of Economic Research (WIFO), Arsenal, Objekt 20, 1030 Vienna, Austria e-mail: [email protected]
Y. Wolfmayre-mail: [email protected]
The substitutability between parent company and foreign afliate employment in Europe
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multinational rms to relocate more production activities to Central and Eastern European countries. Fears of job losses due to offshoring to low cost countries (i.e. Central and Eastern Europe, China, South-East Asia) may also force some governments to introduce policy measures that increase incentives to invest at home. For instance, the US government introduced the Homeland Investment Act in 2004 that creates a temporary tax holiday for dividends returned to the United States parent corporations from controlled foreign corporations (UNCTAD 2007). In Germany, the former chancellor Gerhard Schrder has criticized some multinational enterprises as unpatriotic after they announced further investment in Central and Eastern Europe at the expense of home country employment (see...