Foreign Ownership and Wages: Evidence from Hungary, 1986–2008

Abstract

This article estimates the wage effects of foreign direct investment (FDI) using firm-level and linked employer-employee panel data containing a large number of foreign acquisitions over a long period of rapid development in Hungary. Matching on pre-acquisition data, the authors find that much of the raw foreign wage premium represents selection bias, but that foreign acquisition nevertheless raises average wages by 15 to 29% when controlling for fixed effects for firms and highly detailed worker groups, and by 6% with firm–worker match effects. Acquired firms that are later divested to domestic owners experience a substantial reversal of the positive acquisition effect. No type of worker—defined by education, experience, gender, incumbency, and occupational group—experiences wage decline, but the patterns suggest skill bias in the gains from acquisition. The evidence implies a strong cross-firm correlation of FDI wage and productivity differentials, and an inverse relationship between FDI effects and economic development level of the sending country relative to Hungary.