GEP Research Paper 99/14

Wages, Productivity and Foreign Ownership in UK Manufacturing

Sourafel Girma, David Greenaway and Katharine Wakelin

This paper was subsequently published in the Scottish Journal of Political Economy , Vol. 48 (2001), pp.119-133.

Abstract

The presumed higher productivity of foreign firms and the resulting potential for spillovers to domestic firms has led governments to offer financial incentives to foreign firms to locate in their country. We investigate if there is any productivity or wage gap between foreign and domestic firms in the UK and if the presence of foreign firms in a sector raises the productivity of domestic firms in that sector. We then relate the size of the spillover parameter to some firm and industry characteristics. Our results indicate that foreign firms do have higher productivity than domestic firms and they pay higher wages even after controlling for the sectors in which they are located and the size of affiliates. This differential is around 5% in terms of total factor productivity and wages once productivity differences are accounted for. However, we find no aggregate evidence of intra-industry spillovers, although sector and firm characteristics influence how they affect individual firms. Firms with low productivity relative to the sector average gain less from foreign firms, as do firms in sectors with low skills and low levels of foreign competition.

Issued in October 1999.

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