RESEARCH Business Labor

WAGES ABROAD
'Technological competition' causes U.S. multinationals to pay more

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

6/1/2000

CHAMPAIGN, Ill. -- Why do U.S. multinational companies pay higher wages than domestic firms in less developed countries?

Even critics of Nike, whose wages and working conditions have become a cause celebre on college campuses, concede that the footwear giant pays higher rates than those prevailing in Asia, where their plants are located. The same pattern is found among multinationals with factories in South America and Eastern Europe.

"The wage differences between multinationals and domestic firms," writes Dan Bernhardt, a University of Illinois economist, "far exceed the differences in rental payments for buildings and land, or prices paid for domestic raw materials by foreign firms compared with their local counterparts."

To find out why this pattern exists, Bernhardt has shown in a theoretical paper that the core issue is not a matter of intervention by government or labor unions so much as the degree of "technological competition" between the multinational and its main domestic rival.

"A multinational company will pay higher wages to discourage a domestic firm from poaching its trained workers and learning its trade secrets," Bernhardt noted. This takes several forms. If a multinational has no rivals in a foreign domestic market, it "will always pay higher wages to prevent competition from arising," he wrote. If, however, the multinational is competing with a local company in the domestic market, it "will pay higher wages if and only if its technology is sufficiently better than the domestic firm's technology."

The corollary is that if a multinational enters a domestic market with technology at the same level as its local competitors, its wages will reflect the same lower wage scale.

Many U.S. multinationals are locating overseas to serve local markets, not to export to the United States. In Poland, for example, 85 percent of multinational company revenues are from local sales.

Bernhardt's analysis helps answer a question that has perplexed analysts of third-world economies. The classic assumption is that multinational companies offer "technology transfer and development" central to the growth of developing countries. While this is true, it is not done because of "altruism," according to Bernhardt; in fact, "most multinationals transfer this information to the domestic companies only reluctantly."

As a result, many multinationals now consider protection of intellectual property rights a critical determinant in whether to invest in a foreign country. Increasingly, "technology competition" will become more important than prevailing local wages or the cost of raw materials in decisions by multinationals of where to locate plants abroad.

His paper, "Why Do Multinationals in Poor Countries Pay High Wages?" was co-written with Vladimir Dvoracek at Simon Fraser University in British Columbia, Canada.