Globalization and income inequality: Implications of foreign direct investment for Japan
Both inward and outward foreign direct investment (FDI) have implications for wages of home country workers. For example, inward FDI is thought to bring in new foreign technologies, employment, and competition, while outward FDI is associated with hollowing out and skill upgrading of domestic economies. These in turn have effects on domestic wages. However, available empirical evidence on the wage effects of FDI for the U.S., the U.K., and other countries appear mixed. For example, evidence on the wages and skill upgrading of the home-country workers of foreign-owned operations (inward FDI) and of firms with foreign operations (outward FDI) are either mixed together (in case of inward FDI) or non-existent (in case of outward FDI). We also note that there is relatively limited evidence for Japan for either types of FDI.
This paper intends to fill in this gap and starts by presenting estimation results on the wage effects for domestic male and female workers in Japan of their employer firms’ outward and inward FDI operations. Secondly, we show that such wage effects depend on gender and worker ranks (e.g. non-managerial workers versus workers in managerial ranks) within their employer firms. Our preliminary study on the impact of firms’ outward FDI on the wages of workers at home in Japan using a unique linked employer-worker data set for Japanese manufacturing industries suggests generally positive wage premiums associated with employers with outward FDIs (Hayami, Nakamura and Nakamura (2012), “Wages, overseas investment and ownership: Implications for internal labor markets in Japan,” International Journal of Human Resource Management 23, 2012, 2959-2974.)
Such wage premiums systematically differ by worker rank with higher premiums for higher managerial ranks.
In this study we extend our earlier study to include estimating the effects of gender as well as inward FDIs. Our preliminary results suggest positive wage premiums for workers of firms with either outward or inward FDI, or both. This leads to our third objective of the paper, which is to establish that globalization (characterized by FDI operations) results in significant positive wage premiums for workers of internationalized (i.e. globalized in terms of involvements in FDIs) firms, while workers of non-internationalized firms will face flat and possibly lowering wage profiles. We know that most internationalized firms are large and competent firms, but they constitute less than 30% of all Japanese corporations and employ less than 10% of all Japanese workers. Thus we conclude that globalization seems to imply, empirically, the increasing income inequality between workers of large internationalized firms and workers of smaller firms, where smaller firms have few opportunities or little capacity to internationalize. Such a widening income gap between the large and small firm sectors of the Japanese economy is consistent with the recent increases in Gini coefficients and other measures of income inequality for Japan. We present some policy suggestions for coping with the income inequality problem of the type discussed.
JEL classification: F23; F16; O53.