Choosy Multinationals

Swedish product. Sort of. Porsche's very upmarket Cayenne SUV is boxy, sturdy, frightfully expensive, and superbly engineered. An epitome of "Germanness"? Well, yes. Except that 80% of it is built in Slovakia.

Is this the shape of things to come: lower-salaried foreigners picking up the jobs while German workers join the dole? Germany's current 5 million jobless —the highest rate since the 1930s— would seem to imply as much.

But is this a typically German thing, or does the malady affect other developed countries as well? And if so, does it affect them all equally?

A bit of well-conducted empirical research on the matter seems in order. That is precisely what Ifo researchers Sascha O. Becker and Robert Jaeckle, together with their colleagues Karolina Ekholm and Marc-Andreas Muendler, did in their latest CESifo Working Paper. They pored over FDI, employment and multinational-enterprise (MNE) data for Germany and Sweden in order to look for trends and their underlying causes.

Both Germany and Sweden have a long history as home countries of globally successful MNEs: just think of Bayer, Siemens, Mercedes Benz, Ericsson, Volvo and IKEA, to name but a few. On top of that, both are close to recent EU accession countries: Germany to the Czech Republic, Poland, Slovakia and Hungary; Sweden to the Baltic states and Poland.

What their research unearthed was both sobering and profoundly disquieting: for a 1% wage decrease in Central European countries (CEE), for instance, close to 1,000 jobs are destroyed in Germany; for a 1% rise in German wages, some 5,000 jobs are created in the CEE. The corresponding figures for Sweden are 140 and 260 jobs, respectively.

To get to the bottom of the matter, the researchers examined two questions: What factors determine where MNEs choose to locate their foreign affiliates and how are firm's employment decisions in these locations affected by wages? To obtain data that is comparable across countries, the authors restricted their attention to majority-owned affiliates in the manufacturing sector.

In 2001, these German MNEs employed about 2.5 million workers abroad —roughly the same number employed at German parent firms—, while Swedish MNEs employed around one million workers abroad, twice the number employed at Swedish parents.

MNEs were found to strive for two goals when choosing a location for their affiliates: expanding market share and attaining cost advantages. The market-expansion aim would appear to explain the fact that German and Swedish MNEs' foreign operations are concentrated in high- rather than low-income countries. A full 63% of the foreign labour force of German MNEs working in industrialised countries in 2000. The same share for Sweden (2002) was even higher, with 77%.

But German MNEs — Sweden's less so— also tend to seek skill-abundant foreign locations, provided of course the price is right. That points to cost-reducing aims.

Affiliate employment of German and Swedish MNEs roughly doubled over the course of the 1990s. No big surprise there: outward FDI from Germany and Sweden to the CEE, for instance, has surged in the past few years.

But does affiliate employment tend to substitute parent employment? The short answer is Yes. Parent employment seems to be most sensitive to wages in Western European host countries: a one percent reduction in wages in these host countries is associated with 0.11 percent lower employment in German parents and 0.23 percent at Swedish ones. A one percent reduction in wages in CEE host countries, in turn, translates into ca. 0.05 percent and 0.09 percent lower employment in Germany and Sweden, respectively. This leads to about 900 fewer jobs in Germany and 140 fewer in Sweden. You can imagine what it means then when this one-percent difference applies to Western European countries: over 2,700 jobs killed in Germany, and 660 in Sweden.

Seen this way, it looks as if the unions in Germany and Sweden are hurting workers rather than helping them when they coax companies to raise salaries: with every raise, they achieve the destruction of quite a few livelihoods at home.


Sascha O. Becker, Karolina Ekholm, Robert Jaeckle, Marc-Andreas Muendler: Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals, CESifo Working Paper No.1374

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