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Foreign Ownership and Wages: Evidence from Five African Countries

Working papers

Written by Dirk Willem te Velde

This paper uses data on individual wages in manufacturing industry for five African countries in the early 1990s to test whether firms owned by foreigners pay higher wages than do forms owned by locals for apparently equivalent workers, and whether such benefits accrue to all or only certain types of workers. We present two main findings. First, foreign ownership is associated with a 20-40 per cent increase in individual wages (conditional on age, tenure and education) on average. This is halved to 8-23 per cent if we take into account the fact that foreign-owned firms are larger and locate in high-wage sectors and regions. Secondly, there is a tendency in some countries for more skilled workers (using occupation and education categories) to benefit more from foreign ownership than less skilled workers, and this conclusion holds after accounting for the size distribution of foreign firms. We discuss, but cannot directly test, the plausibility of two explanations for these findings: 1) foreign-owned firms employ technologies that are more skill-biased than technologies in local firms and 2) skilled workers in foreign firms are more effective in rent-sharing than other workers. We contend that these explanations may not be mutually exclusive, hence cannot be empirically distinguished.

Dirk Willem te Velde and Oliver Morrissey