Wednesday, November 26, 2008

Do multinationals promote better pay and working conditions?

This one is very IB economics!

It is the title of a recent OECD report and of a summary article found here. It is excellent reading as it provides the IB Economics student (both higher level and standard level) not only with information that is very relevant to the syllabus but also with a style of writing that candidates should try to emulate. To convince you that it is worth clicking on the link above, saving and reading the article, here are some quotes:
If ever there was a question to provoke impassioned debate between supporters and opponents of globalisation, the title of this article may be it. A harbinger of progress and higher standards of living, will say the yeas, a cause of underdevelopment and Western-style exploitation, will roar the nays. The protagonists rarely agree.

Who is right? Before attempting an answer, let’s start by looking at what the term “multinational” actually means. Crudely speaking, multinational enterprises (MNEs) are corporations with headquarters in one country and affiliates, subsidiaries or merged operations in one or several others. These firms expand abroad to gain market share, or to tap into local resources like raw materials and cheaper labour. Think major US brands, such as Coca-Cola, Nike and Microsoft, or the French energy company, EDF, the British-Australian mining firm, Rio Tinto, and Japan’s Toyota.


On the whole, the OECD report shows that MNEs do tend to pay more than local firms, though the difference lessens with local firms that compete in the same markets. In general, foreign multinationals pay 40% higher in average wages than local firms, and the differential is higher in low-income countries of Asia and Latin America. They may offer higher pay than their local counterparts because this helps to minimise worker turnover and reduce monitoring costs.

Comparing workers who stay on in firms that are taken over with their counterparts in domestic firms, shows that foreign takeovers had only a very slight or no effect at all on individual wages. This indicates that average wage gains due to foreign takeovers partly reflect changes in the skill composition of the workforce that tend to accompany such takeovers.

But wages are only one side of the coin: what about working conditions? One argument used by proponents of FDI is that multinationals promote socially responsible investment, and some of the literature backs this view. However, the analysis of foreign takeovers in the report suggests that FDI might not have much effect on working conditions.
Click, save, read, summarize: it's worth the hour you'll spend!

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