U.S. Department of Labor 

Bureau of International Labor Affairs 

Office of Trade and Labor Affairs 

Contract Research Program

Download this and other papers at 

http://www.dol.gov/ilab/media/reports/otla/

The views expressed here are those of the author(s) and do not 

necessarily represent the views or official positions of the U.S. 

Government or the U.S. Department of Labor. 
1 

FDI, Trade in Services, and Employment and Wages in U.S. Service Industry Firms1

Robert E. Lipsey 

Introduction 

Service industries in the United States, which have been the locus of much of U.S. 

comparative advantage in trade, and some of which had been thought to be virtually impervious 

to foreign competition, now are the subject of frequent warnings in the press and in academic 

analyses that their competitiveness is declining or disappearing, or at least that they are newly 

subject to competition from abroad, especially from developing countries with low wage levels. 

The main force behind the change in outlook is the fall in communication costs. These 

play, for services, the role that transportation costs play for goods as a determinant of the 

location of production and the extent and direction of trade. A fall in communication costs opens 

U.S. markets for services to exports by low-cost producers of services in other countries that 

were previously excluded from the U.S. market by the high cost of international communication. 

At the same time, it opens markets in other countries to exports by low-cost U.S. producers of 

services that were previously excluded from foreign markets by international communication 

costs. 

Similarly, the fall in communication costs reduces the barriers to foreign service 

producers that wish to open affiliates in the United States to sell services that the parent firm 

had learned how to produce at low cost and high quality for its domestic market, if the foreign 

parent firm needed low-cost communication to manage these affiliate operations. In the other 

direction, the fall in communication costs could enable low-cost service producers in the United 

 

1

 The statistical analysis of firm-level data on U.S. multinational companies reported in this paper was 

conducted at the U.S Bureau of Economic Analysis, under arrangements that maintained legal 

confidentiality requirements. I am indebted to Kevin Barefoot, Jing Sun, and Takuya Hasebe for research 

assistance and to Maria Borga for guidance with respect to the BEA data.
2 

States to expand foreign operations that were previously too complex to manage from the 

United States. In recognition of the internationalization of service industries through foreign 

direct investment (FDI), the 2004 UNCTAD World Investment Report was subtitled “The Shift 

Towards Services.” 

The result of these reductions in communication costs should be increasing 

internationalization of each country’s service industries and service markets. That 

internationalization could take several forms. One is increasing exports of services relative to 

production in the more competitive of each country’s service industries. Another is increasing 

imports of services relative to consumption in the less competitive of the country’s service 

industries. Still another form of internationalization is the increasing production of services by 

U.S. or other countries’ service industry affiliates operating outside their home countries, relative 

to home-country production by their parent companies or by home-country firms in general. 

Literature Review

 This paper is about the effects on U.S. labor in the service industries of the increased 

tradability, trade, and international production of services that has been brought about 

principally by the declines in communication costs and other technical developments and the 

growth of foreign investment in services. One result of these developments has been the 

opening of the U.S. market to imports of services that had been thought to be nontradable or 

barely tradable or to be areas of U.S. comparative advantage. Although this study is about 

effects on labor in the United States, the phenomenon is worldwide and affects labor and 

consumers in many countries. 

The literature relevant to this subject has concentrated on the issue of “Offshoring”, or 

imports, with very little attention to exports and very little attention to the provision of services 

across national boundaries by foreign direct investment, Mode 3 in the terminology of the World 

Trade Organization (WTO). One of the few to even mention these other aspects of trade in 
3 

services was the paper by Bhagwati, Panagariya, and Srinivasan (2004). They pointed out that 

the decline in communication costs that fostered service imports into the United States also 

encouraged exports from the United States and production from U.S. FDI as well as imports into 

the United States. 

Among the studies of offshoring, the one closest to this one with respect to the type of 

data used is the paper by Borga (2005), a description of the BEA data on U.S. parent firms and 

their affiliates in 1994 and 2002. Since most of what has been learned from these data refers to 

manufacturing, the comparisons between manufacturing and services provide a valuable 

context for the analysis of service firms and industries 

 The 163 parent companies in Borga’s service industry panel were much larger, on 

average, than the 822 in the manufacturing panel in 2002, had grown much faster in 

employment since 1994, and paid much higher wages, averaging $82,000 for the year, as 

compared with $58,000 in manufacturing. Thus, the service industry parent companies were, 

on average, employing a much more skilled labor force than the manufacturing parent 

companies. The majority-owned foreign affiliates of these service firms grew twice as fast in 

employment as manufacturing affiliates and paid average wages about 50 percent higher than 

those of manufacturing parents. 

 The paper is descriptive, for the most part, and contains few conclusions relating to 

service firms. It is noted that while changes in the use of goods imported from affiliates were 

associated with changes in parent employment, no significant correlation was found for parent 

purchases of services from affiliates. 

 A recent study by Crino (2009) analyzes the employment effects of service offshoring by 

Italian firms, using propensity score matching. Offshoring is defined simply as the purchase of 

business or transportation services from abroad, and worker skill is defined as the share of 

workers with a college degree. The controls include many firm characteristics, including foreign 
4 

participation in the firm, but the extent of participation in offshoring is not quantitative. The main 

conclusion is that service offshoring had no effect on total employment, but shifted the 

composition of the offshoring firms’ employment toward high-skill workers. 

 Another study, mainly concentrating on IT industries and related particularly to the 

direction of the shift in skill levels, is a paper by Kierkegaard (2008) that emphasizes the “rapidly 

deepening skill bias affecting these types of employment” (p. 413) in the United States. The 

paper expresses some skepticism about the elasticity of supply of highly skilled IT workers, 

even in India, and suggests that the growth of the most successful service-exporting firms in 

foreign countries will lead them to expand their own affiliate operations in the United States to 

take advantage of the highest-skill workers. 

 Along similar lines is an analysis of the consequences of the growth of service exports 

on the exporting country by Ahmed (2009) examining the effects of service exports from India. 

The simulations in that paper project large increases in the wages of skilled workers as a 

consequence of the growth in the service export sector, confirming Kierkegaard’s expectations 

about wages in the IT sector. 

 A major trend in the recent literature is to shift the basis for offshoring choices from the 

firms making the choices or their industries, or the characteristics of the final products or 

services, as in this paper, to the characteristics of the occupations involved, and from the level 

of skill involved in the occupation to the nature of the tasks required in different stages of 

production. The characteristics of the tasks can then be linked to characteristics of the labor 

force to predict effects of offshoring on different types of workers. One model of this type of 

offshoring was offered by Grossman and Rossi-Hansberg (2008), emphasizing the distinction 

between high-skill and low-skill tasks, but the article mentions some suggestions by other 

writers of ways other than skill levels of distinguishing tasks . The task characteristics various 

authors have mentioned as determining the likelihood of offshoring include the distinction 
5 

between “codifiable” and “tacit” information, between “routine” and “nonroutine” tasks, or 

interactive or non-interactive tasks. 

 An example of this shift is the paper by Baumgarten et al. (2010) on the effects of 

offshoring in manufacturing on German workers in manufacturing. The study finds “modest” 

effects of offshoring within industries but substantial negative wage effects, especially for low 

and medium-skill workers, when movements of workers between industries are included. The 

negative wage effects on low-skill workers performing tasks requiring the lowest level of 

interactivity, those most readily offshored, were more than four times as large as for low-skill 

workers performing tasks with the highest level of interactivity. 

 In an ingenious study aiming to identify vulnerability to offshoring (Jensen and Kletzer, 

2006), the authors identified the service activities at risk as those with production geographically 

concentrated and output extensively traded within the United States. Those activities that are 

considered not vulnerable are those that are mainly produced where they are consumed, 

presumably because transport or other costs of moving the service from producer to consumer 

are too high. 

 A study of the offshoring of “white-collar employment” in occupations in the United 

States by Crinò (2010) bases estimates of the tradability of occupations on measures of 

“...involvement in routine cognitive tasks, dependence on ICT and degree of face-to-face 

interaction...” (Crinò, p. 596). The paper estimated “labour demand elasticities with respect to 

service offshoring” for many white collar occupations associated these elasticities with skill 

levels and degrees of tradability for each occupation. It concluded that the offshoring increased 

U.S. employment in the more skilled occupations relative to the less-skilled, and that, within skill 

levels, more tradable occupations were offshored to a greater extent. 

 The paper on offshoring in manufacturing by Ebenstein, et al. (2009), while it deals 

mainly with that sector, includes some data from the same sources on workers in service 
6 

industries. These show a decline in the number of service industry workers with less than a 

high school degree, while the numbers in other categories, particularly those with college or 

advanced degrees increased substantially. They also report that average wages have been 

consistently lower in services than in manufacturing, a characteristic that does not match the 

wage levels in the multinationals we examine here. 

 A broad study of offshoring by the OECD (2007) concluded that there were negative 

short-term effects on labor in the offshoring country of both offshoring and outward FDI in 

service industries, but that the effects would be limited by sharp increases in the wages of 

skilled labor in emerging countries. 

A different set of effects of outsourcing of services is proposed in a paper (Gorg and 

Hanley, 2009) that suggests that outsourcing of service inputs increases innovation. The 

empirical analysis is based on a set of plant level data for Ireland in 2002-2004 providing 

information on the domestic and international outsourcing of services and R&D at the plant 

level. International, but not domestic, outsourcing of services leads to higher profits and higher 

levels of R&D. 

The United States International Trade Commission publishes an annual report on 

“Recent Trends in U.S. Services Trade” that mostly summarizes information from other U.S. 

government agencies, but also, in the chapters on individual service industries, includes some 

information on the main companies involved, information never given in the data from the BEA 

or the U.S. Treasury Department. The chapter on retailing in the 2010 report, for example, 

gives the reader an idea of the operations of Wal-Mart in U.S. FDI in retailing and of foreignowned retail operations in the United States. 

The ITC report is at least less one-sided than most of the literature reviewed, in that it is 

not confined to service offshoring by the United States, but at least acknowledges developments 

on the U.S. export side as well as the import side and the outward as well as inward side of FDI 
7 

in services. The literature in this area in general is narrowly focused on imports and fails to 

appraise the two sides of the consequences of falling communication costs. 

The Universe Studied

 This study is based on a confidential individual firm data set on multinational service 

industry firms collected by the Bureau of Economic Analysis of the U.S. Department of 

Commerce. The firms in the data set consist of both U.S. operations (parent data), with 

information on numbers of workers and their wages for employees in the United States, and 

their foreign operations, or foreign affiliates, with information on many aspects of their 

operations, including their output, employment and wages, and trade with the United States. 

The main analysis is limited to what are referred to as continuing firms, firms operating as 

service industry multinationals from 1999 through 2004, because the data are most complete 

and comparable over that period. In addition to the continuing firms, the data set also includes 

firms disappearing by changing their industries, by closing down, by being acquired by other 

firms, or by losing their multinational status, and firms entering the industries as multinationals, 

but these are excluded from the main analysis. Their importance relative to the continuing firms 

is measured in Appendix A. The dataset also includes information about the operations of 

foreign firms’ service industry affiliates in the United States. 

 Since the source data are confidential, some tables here suffer from suppression of data 

when the number of reporters is small or heavily dominated by a small number of reporters. In 

addition, I do not show any equations based on fewer than 20 firms and do not report constant 

terms. 

Table 1 provides measures of the labor force in the main groups of firms whose 

operations are studied here. The parent firms cover a little less than a quarter of the U.S. 

employees in the industries we study and the affiliates of foreign firms a little over 5 percent. 
8 

Table 1 

The Number of Employees in the Service Industries (thousands) 

 US Parents 

US Affiliates of 

Foreign Parents 

Foreign Affiliates of 

US Parents US industry 

 1999 2004 1999 2004 1999 2004 1999 2004

All service industries 

 

13,275 

 

12,913 

 

3,235 

 

3,309 3,820 4,702 

 

97,543 

 

102,029 

Covered industries 10,356 10,026 2,223 2,285 2,733 3,231 42,956 43,475 

 Wholesale trade 

 

908 

 

950 

 

527 

 

579 712 760 

 

5,667 

 

5,692 

 Retail trade 

 

3,856 

 

3,970 

 

740 

 

695 442 882 

 

15,167 

 

15,280 

 Transp. & warehousing 

 

1,140 

 

944 

 

178 

 

202 194 247 

 

4,376 

 

4,321 

 Informationa 

 

1,931 

 

1,785 

 

344 

 

290 619 475 

 

3,390 

 

3,109 

 Finance & insuranceb 

 

1,367 

 

1,090 

 

264 

 

267 280 281 

 

5,733 

 

5,973 

 Real estate, rental, & leasing 

 

140 

 

278 

 

53 

 

59 55 63 

 

2,073 

 

2,164 

 Prof., sci., & tech. services 

 

1,015 

 

1,009 

 

116 

 

193 432 524 

 

6,550 

 

6,936 

 Arch., eng. & related services 

 

112 

 

153 

 

33 25 ~ 50 51 42 

 Comp. systems design 

 

394 

 

342 

 

36 

 

63 179 257 

 

1,181 

 

1,162 

 Manage., sci. & tech. serv. 

 

105 

 

63 

 

3 

 

8 42 53 

Source: the website of BEA 

 US Direct Investment Abroad: Revised 2004 Estimates, Revised 1999 Estimates 

 Foreign Direct Investment in the United States: Revised 2004 Estimates, Revised 1999 

 Estimates 

 Gross-Domestic-Product-by-Industry Accounts, Full-time and Part-Time Employees by 

 Industry 

Notes: “All service industries” is not a category distinguished in the source, but is the sum of 

those listed above, plus “Management of nonbank companies and enterprises,” “ 

Administration, support, and waste management,” “Health care and Social Assistance,” 

“Accommodation and food services,” and “Miscellaneous services.” 

a

Consisting of Publishing, Motion picture and sound recording, Broadcasting (except 

internet), Telecommunications, and Internet, data processing, and other information 

services. 

b

Consisting of Securities, commodity contracts, and other intermediation and related 

activities, Other finance, except depository institutions, and insurance carriers and related 

activities. 
9 

Employment in the foreign affiliates of U.S. parents was about a third of parent employment and 

that of U.S. affiliates of foreign parents was 23 percent of U.S. parent employment. The 

Information industry was much more international than the average. In that industry, U.S. 

parents accounted for over half of U.S. employment and their overseas affiliates added over a 

quarter to their parents’ employment. 

In the Computer systems design industry, employment in overseas affiliates of U.S. 

parents was about three quarters of parent employment. In this industry, affiliate employment 

grew and parent employment fell by almost the same number. 

Table 2 shows as “wages” the average annual compensation, including payments in kind 

and employer expenditures for employee benefit plans, in each of the industries we cover, in 

U.S. parent firms, their foreign affiliates, and U.S. affiliates of foreign firms in 1999 and 2004. 

We interpret the wage levels as reflecting the average skill levels in each group. Among U.S. 

parents, the highest wages, and presumably highest skill levels, were in Finance and insurance 

and Management, scientific and technical services. The highest wages in U.S. affiliates abroad 

were also in Management, scientific and technical services, where the foreign affiliate average 

wages were over $100,000 in 2004, close to the average in the parent firms. Wages, and 

presumably, skill levels, in U.S. affiliates of foreign parents were high, higher in most industries 

than those in U.S. parent firms, even though they do not include headquarters personnel. 

The extent to which imports of services compete with employment in the corresponding 

U.S. service industries depends partly on the nature of the local industry’s functions. If the 

function is mainly to provide services ancillary to the sale of goods in the U.S. market, whether 

by foreign exporters of goods or U.S. goods producers, services imported from other countries 

may not compete with the U.S. service providers. That is likely to be the case for service 

industries in which the sales consist mainly of goods. The composition of service-industry 

sales, between goods and services, is shown in Table 3 for majority-owned nonbank affiliates. 
10 

Table 2 

Industry Average Annual Wage of US Parents and their Affiliates 

and U.S. Affiliates of Foreign Parents 

(US dollars) 

 US Parents Foreign Affiliates 

 of US Parents 

US Affiliates 

of Foreign Parents 

 1999 2004 1999 2004 1999 2004 

All service industries 

40,235 

 

50,393 

 

35,265 

 

39,308 42,631 55,695 

Covered Industries 

45,232 

 

56,111 

 

42,022 

 

47,624 51,148 68,115 

 Wholesale trade 

52,309 

 

63,433 

 

47,122 

 

55,796 58,286 79,769 

 Retail trade 

17,993 

 

24,183 

 

15,095 

 

16,824 22,751 28,381 

 Transp. & warehousing 

52,591 

 

64,279 

 

29,282 

 

30,020 37,536 46,432 

 Information 

55,086 

 

74,607 

 

37,014 

 

59,205 62,382 81,756 

 Finance & insurance 

82,052 

 

112,108 

 

68,702 

 

88,311 105,670 138,683 

 Real estate, rental, & leasing 

42,505 

 

36,515 

 

36,490 

 

38,381 50,974 58,193 

 Prof., sci., & tech. services 

66,174 

 

79,367 

 

57,421 

 

64,738 63,810 83,587 

 Arch., eng. & related 

57,025 

 

74,938 

 

51,918 

 

62,199 60,000 (*)

 Comp. systems design 

71,844 

 

91,733 

 

70,017 

 

68,480 72,374 98,744 

 Manage., sci. & tech. serv. 

82,490 

 

105,197 

 

76,916 

 

102,814 85,000 102,500 

Source: the website of BEA 

 Foreign Direct Investment in the United States: Revised 1999 Estimates 

 Revised 2004 Estimates 

 (*) Indicates that the data are suppressed 

 Average wage is total annual compensation including payments in-kind and employer 

 contributions to employee benefit plans.
11 

Table 3 

Distribution of Sales of Goods and Services 

by U.S. Parent Companies, 1999 (Percent) 

 (millions of dollars) 

 1999 

 Sales 

 Goods Services 

 

 All Service Industries 39.8 50.8 

 

 Covered Industries 42.2 47.4 

 

 Wholesale trade 92.5 7.0 

 

 Retail trade 99.5 0.3 

 

 Transp. & warehousing (D) 95.8 

 

 Information 8.5 91.2 

 

 Finance & insurance (D) 66.8 

 

 Real estate, rental, & leasing 7.3 88.0 

 

 Prof., sci., & tech. services (D) 83.4 

 

 Arch., eng. & related 15.2 84.8 

 

 Comp. systems design (D) 69.8 

 

 Manage., sci. & tech. serv. (D) (D) 

 

Source: the website of BEA, U.S. Direct Investment Abroad, 

 Revised 1999 Estimates 

Note: (D) indicates the data are suppressed. 

The sum of sales of goods and services does not equal total sales 

 because of “investment income.” 

“All service industries” and “covered industries” are the sums 

of the industries for which data are available. 
12 

Questions, hypotheses and assumptions

 The United States was a pioneer in the early growth of foreign direct investment (FDI), 

particularly in manufacturing, even when it was, on balance, a capital importer. The United 

States has favored international agreements that encouraged an open policy toward inward 

investment and, in recent years, rules extending more open inward investment policies to 

service industries, which have been more restricted than manufacturing. The share of service 

industries in world FDI has been growing, but data on the international operations of service 

industries outside finance are still scarce. 

Despite the success of multinational operations for their owners, there have been 

persistent questions about impacts on both their home countries and the host countries in which 

they operate. There is a long literature on multinationals’ effect on their home countries’ export 

trade and another literature on their effects on home and host country labor. This paper’s 

questions relate to home country labor effects in U.S. service industries and, in particular, their 

relation to employment, wage changes, the demand for skills, and the skill composition of 

industries, as they are affected by the international operations of U.S. multinational firms. The 

aspects of their operations studied are the location of their production and their trade in and out 

of the United States. 

 The analyses here are exploratory: an effort to learn how firms in service industries 

operate internationally and how particular actions affect their employees in the United States. 

The limits of the analyses reflect the limits of what we know about service industry firms’ 

structure and production. The industry categories within services in which data are collected 

are much broader than in manufacturing. Much of production is intangible and output is difficult 

to measure. Not only production, but inputs also are often intangible, making productivity 

measures questionable. And the difficulty of measurement extends to exports and imports, 

because intangibility of output and low communication costs sometimes make the location of 

production ambiguous (Lipsey, 2007, 2008, and 2010). 
13 

 Most of the standard theory of production comes from manufacturing and agriculture, 

and deals with the combination of physical capital and labor. It is much less clear how 

production takes place in many service industries, what inputs are used, and where the inputs 

and the production take place. This paper is more an effort to find out how service production 

and trade take place and what kind of strategies multinational firms use to operate 

internationally than an attempt to apply an established theory to a clearly measured reality. 

 There is an underlying trend toward multinational operations that seems to affect almost 

every country’s firms. It is partly driven by the decline of travel, and especially communication, 

costs that has lowered the cost to a firm of producing outside its home country. That long-term 

trend was documented in UNCTAD (2001) and has been confirmed in UNCTAD’s later World 

Investment Reports. In more recent years, the fall in communications costs has been one of the 

factors that have reduced the cost of fragmenting production, building chains of stages of 

production that take advantage of differences in production costs smaller than those formerly 

required for the complete relocation of production.2

 Multinational firms tend to be, within their industries, the higher productivity firms. For 

firms based in the United States, I associate that higher productivity with a higher average skill 

level, and my proxy for this is a higher average wage level. Thus, when I divide industries into 

firms with average wages above the median and below the median for their industry, I interpret 

the division as being between higher and lower productivity firms. 

 To the extent that imports are for final consumption, rather than as inputs into 

production, they would be expected to be negatively related to U.S. employment in the 

corresponding industries. That could be the case also if the imports were inputs into production, 

but substituted for what were formerly inputs produced domestically. On the other hand, if the 

 

2

 See, for example, Kimura and Ando (2006), on Japanese production networks. 
14 

imports were inputs that replaced more expensive domestically produced inputs, they might 

raise U.S. output, employment, and wages in the industries using them 

 I ask mainly how the actions of individual service industry parent firms affect these firms’ 

labor forces, and more broadly, the effect of trade and investment in service industries on the 

demand for skills in the United States. The information I have about the labor forces are the 

number of employees and the average wage in each parent firm. I take these in cross-sections 

of firms to be a measure of the average skill level of the firm’s workers, and over time to 

represent changes in average skill, changes in worker pay rates, or some combination of these. 

The firms’ actions I study include increasing or decreasing employment in the firm’s own foreign 

affiliates and increasing or decreasing the parent firm’s imports and exports of services. I 

subdivide the firms’ production location strategy into adding or subtracting employment in 

developing countries and doing so in developed countries, in the expectation that the choice 

may affect the skill composition of home employment. I also subdivide the firms in each 

industry into those whose employees earn, on average, above-median wages and those 

earning below-median wages, as a way of estimating how foreign production and trade affect 

workers of different skill levels. 

 After many experiments with different forms of equations, I rely mainly on measuring 

absolute changes in employment, trade and other variables. However, some relative change 

equations are included for comparison. They gave more erratic results, probably because there 

were many changes from small initial numbers. 

 The most basic empirical specification used in this study is a simple linear regression of 

the change in affiliate employment, change in imports or change in exports on the change in a 

parent company’s employment level between 1999 and 2004. That is, 

ΔPEij = a + bΔAEij 

where ΔPEij is the change in parent employment for firm “i” in industry “j” and ΔAEij is the 

change in affiliate employment for firm “i” in industry “j” . I consider separately the impacts of 
15 

changes in affiliate employment in developed (AEA) and developing countries (AEB), and also 

explore the relationship between parent employment and changes in imports and exports of 

services by parents (denoted ΔPIM and ΔPEX). Similar relationships between changes in firm 

level average wages (ΔWij) and affiliate employment and parent imports and exports of services 

are also explored. 

Affiliate and Parent Employment

 The analysis begins with the relation of parent employment in the United States to the 

growth (or decline)of each parent’s own affiliate employment in foreign countries, asking first 

whether there is any simple relationship between them and then whether the characteristics of 

the locations for overseas production or the initial skill levels of the parent firms affect the 

relationship. The interpretation of the results for changes in affiliate employment is facilitated by 

reference to the direction of changes in affiliate employment in the various industries. 

Employment in affiliates in developed countries rose in every industry except Information, where 

it declined by 20 percent. However, employment in developing country affiliates declined in 

Wholesale trade in durables, Transportation and Warehousing, Information, Finance and 

insurance, and, among Professional and related services, in Architectural, engineering, and 

related services. 

A simple relationship between affiliate employment and parent employment is described 

in Table 4. Over a quarter of the variance in firm employment growth in the U.S. can be 

explained by the expansion or contraction of employment abroad. Whatever relationships exist 

appear to be positive: firms that expanded their employment abroad also expanded their 

employment in the United States and firms that contracted abroad also contracted in the United 

States. The relationship was strongest in Retail trade, Finance and insurance, and 

Architectural, engineering, and related services, and a little weaker, but substantial, in 

Information and in Management, scientific, and technical consulting services. It should be 
16 

Table 4 

Relation of Change in a Parent’s U.S. Employment (PE) 

to Change in its Affiliate Employment (AE), 1999-2004 

ΔPE = a + bΔAE 

Industry No. obs. Coefficient t 2

R 

 

All service industries 1070 0.759 20.72 0.286 

 Wholesale trade 

 Durable 183 0.132 0.81 -0.002 

 Nondurable 99 -0.093 0.65 -0.006 

 Retail trade 70 1.037 10.52 0.614 

 Transp. & warehousing 59 0.391 1.90 0.043 

 Information 130 0.539 4.12 0.110 

 Finance & insurance 96 1.134 6.98 0.334 

 Real estate, rental, & leasing 37 0.227 0.60 -0.018 

 Prof., sci., & tech. services 208 0.283 3.31 0.046 

 Legal 22 0.658 1.67 0.079 

 Arch., eng. & related 36 0.800 4.05 0.306 

 Comp. systems design 53 0.169 2.05 0.058 

 Manage., sci. & tech. serv. 31 1.024 2.93 0.202 

 
17 

remembered that In Architecture, etc., and particularly in Information, the changes in foreign 

affiliate employment were negative on average, and to the extent that they were negative, were 

associated with declines in parent employment. 

These relationships were as frequently positive, but less frequently statistically 

significant, in the relative change equations summarized in Table 5. My interpretation of these 

results is that the factors that led a parent to expand or contract employment abroad had the 

same effect on employment at home. There is no indication here that a parent’s expansion 

abroad was principally in competition with expansion at home. 

Since most of the concern about employment effects of a shift of service industry activity 

abroad centers on competition from developing countries, the foreign affiliate employment is 

separated into that in developed and that in developing countries in Tables 6, 7, and 8, first 

examining the two locations for affiliates separately and then combining them. 

Changes in affiliate employment in developed countries are consistently and positively 

related to changes in the same direction in employment by their parent companies (Table 6). 

The results may simply reflect parallel changes in demand for services between the United 

States and other developed countries, or they may reflect dependence of home employment on 

developed country affiliate employment. They do not suggest rivalry between the two types of 

service production locations. 

 The story for affiliate employment in developing countries is described in Table 7. The 

correlation between parent and affiliate employment is less close, more of the coefficients for 

affiliate employment are statistically insignificant, two of them are negative and statistically 

significant. In both industries, Transportation and warehousing and Computer systems design, 

the aggregate data in Table 1 show declines in aggregate U.S. parent employment of 13-17 

percent. Employment in the developing country affiliates of Computer systems design parents 

rose, suggesting a substitution of developing country labor for U.S. labor, but employment in 

developing country affiliates in Transportation and warehousing fell, suggesting a demand side 
18 

Table 5 

Relation of Relative Change in a Parent’s U.S. Employment (RPE) 

to Relative Change in its Affiliate Employment (RAE), 2004/1999 

Industry No. obs. Coefficient t 2

R 

 

All service industries 903 .148 6.25 .040 

 Wholesale trade 

 Durable 171 .125 2.26 .023 

 Nondurable 87 .100 2.42 .053 

 Retail trade 65 .122 1.22 .008 

 Transp. & warehousing 53 .003 0.04 -.020 

 Information 122 .150 2.48 .041 

 Finance & insurance 75 .300 4.22 .185 

 Real estate, rental, & leasing 25 .493 3.00 .250 

 Prof., sci., & tech. services 185 .081 1.55 .007 

 Legal 20 .053 0.26 -.051 

 Arch., eng. & related 33 -.082 0.67 .018 

 Comp. systems design 51 .093 1.30 .013 

 Manage., sci. & tech. serv. 26 .152 0.87 -.010 

 
19 

 

Table 6 

Change in Parent Employment (PE) as a Function of 

Change in Affiliate Employment in Developed Countries (AEA),1999-2004 

ΔPE = a + bΔAEA 

Industry No. obs. 2

R Coefficient t 

 

All service industries 1052 0.257 0.86 19.11 

 Wholesale trade 

 Durable 161 0.053 1.448 3.15 

 Nondurable 102 0.153 2.332 4.38 

 Retail trade 61 0.932 1.491 28.65 

 Transp. & warehousing 51 0.382 0.403 5.65 

 Information 149 0.157 1.888 5.34 

 Finance & insurance 103 0.392 0.824 8.18 

 Real estate, rental, & leasing 33 0.372 2.471 4.47 

 Prof., sci., & tech. services 209 0.044 0.287 3.24 

 Arch., eng. & related 32 0.186 1.220 2.84 

 Comp. systems design 55 0.029 0.828 1.62 

 Manage., sci. & tech. serv. 29 0.072 0.200 1.78 

 

 
20 

Table 7 

Change in Parent Employment (PE) as a Function of 

Change in Affiliate Employment in Developing Countries (AEB),1999-2004 

ΔPE = a + b ΔAEB 

Industry No. obs. 2

R Coefficient t 

 

All service industries 624 0.182 1.352 11.80 

 Wholesale trade 

 Durable 104 -0.003 0.086 0.86 

 Nondurable 53 0.778 4.585 13.55 

 Retail trade 43 0.695 2.897 9.83 

 Transp. & warehousing 38 0.288 -0.729 4.00 

 Information 74 0.249 1.399 5.02 

 Finance & insurance 69 0.121 0.532 3.22 

 Prof., sci., & tech. services 111 0.058 0.342 2.78 

 Arch., eng. & related 20 0.565 4.053 5.06 

 Comp. systems design 27 0.676 -0.653 7.44 

 
21 

Table 8 

Coefficients for Growth in Affiliate Employment in Developed (AEA) and Developing (AEB) Countries 

in Regressions for Parent Employment Growth (PE), 1999-2004 

ΔPE = a + b ΔAEA + c ΔAEB 

Industry No. obs. 2

R AEA AEB 

 Coefficient t Coefficient t 

 

All service industries 386 .361 .983 11.7 .163 .78 

 Wholesale trade 

 Durable 63 .178 1.49 3.6 -.564 2.22 

 Nondurable 34 .650 7.50 5.5 1.22 2.74 

 Retail trade 27 .855 .950 1.88 1.42 .500 

 Information 57 .093 .286 .55 1.28 1.16 

 Finance & insurance 51 .096 .112 .23 1.17 2.40 

 Prof., sci., & tech. services 81 .202 .489 2.92 -.449 4.06 

 Comp. systems design 24 .703 .682 4.49 -.594 6.14 

 
22 

effect. In the case of Information, employment fell in both developing country affiliates and 

parents, producing a positive coefficient. 

 For those parent firms that owned affiliates in both developed and developing countries, 

Table 8 shows the relation of parent employment growth to the growth of affiliates in the two 

regions. In Wholesale trade in durables, growth in employment in developed countries was 

significantly associated with growth in parent employment while the negative coefficient for 

affiliates in developing countries, where affiliate employment declined, suggested a substitution 

of home employment for that in developing country affiliates. In contrast, in Computer systems 

design and related services, and in the broader group of Professional, scientific and technical 

services, employment growth in developed country affiliates tended to raise parent employment, 

while employment growth in developing country affiliates significantly reduced parent 

employment growth. 

 The combination of the influences of the choice between developed and developing 

countries for affiliates and the position of the parent company in its industry’s skill ranking is 

explored in Table 9. Among the parents with higher-skill labor, the significant and marginally 

significant industry coefficients for affiliate employment in developed countries were positive in 

five cases, and negative for only one, Wholesale trade in nondurables. The statistically 

significant coefficients for affiliate employment in developing countries were positive in three out 

of four cases and negative in one, Management, scientific, and technical services. Thus, for the 

higher skill parent firms, additions to affiliate employment in both developed and developing 

countries were mostly accompanied by additions to employment in the United States. Among 

the lower-skill parent firms, there were two industries, Wholesale trade in durables and Retail 

trade, in which higher employment in developing countries was significantly associated with 

lower parent employment, and one, Finance and insurance, in which the relation was positive. 

In both the industries with negative home employment relations to employment additions in 

developing countries, employment additions in developed countries went along with higher 
23 

Table 9 

Coefficients for Changes in Affiliate Employment in Developed and Developing Countries, 1999

in Equations for Employment by Parents with 1999 Average Wages Above and Equal to or Below 

ΔPE = a + bΔAEA + cΔAEB 

 Parent Average Wage Above or Equal to Median Parent Average W

Industry 

No. 

obs. 2 R 

Coefficient for 

Employment in t No. obs. 2 R Coe

Emp

A B A B A 

All service industries 570 0.104 -0.846 0.507 7.91 3.47 500 0.352 1.088  Wholesale trade  Durable 125 0.007 1.193 -0.063 1.70 0.29 58 0.299 2.940  Nondurable 60 0.191 -1.610 1.049 2.13 3.43 39 0.010 0.34 Retail trade 35 0.145 3.386 -0.329 1.85 0.21 35 0.685 3.396  Transp. & warehousing 30 -0.048 1.071 -0.899 0.71 0.37 29 0.193 0.837  Information 68 0.756 2.354 0.091 12.03 0.44 62 0.102 -0.02 Finance & insurance 51 0.027 1.049 0.384 1.82 0.49 45 0.380 1.00 Real estate, rental, & leasing 22 -0.010 -0.397 1.048 1.20 1.30  Prof., sci., & tech. services 134 0.044 0.268 0.633 1.35 1.47 74 0.059 0.476  Arch., eng. & related serv. 22 0.941 2.869 5.177 7.66 13.22  Comp. systems design 45 0.280 0.198 0.793 1.47 2.06  Manage., sci. & tech. serv. 23 0.643 1.911 -7.626 5.66 4.05 

A = Developed countries B = Developing countries
24 

home employment and the same was true for those in Transportation and warehousing, 

Finance and insurance, and Professional, scientific, and technical services. 

In general, the results in Tables 4-9 show that affiliate employment growth was in 

general associated with growth in their parents’ employment in the United States. That is the 

case for all industries with respect to affiliate employment in developed countries, and in most 

industries in developing countries as well. However, in two industries, Transportation and 

warehousing and Computer systems design, affiliate employment in developing countries was 

negatively related to parent employment and may be thought of as competing with it. Some of 

the same phenomenon appears among firms with affiliates in both types of destination country. 

In three industries, Wholesale trade in durables, Professional scientific, and technical services, 

and its subgroup, Computer systems design, affiliate employment in developed countries was 

positively and significantly related and affiliate employment in developing countries was 

negatively and significantly related to parent employment. 

Trade and Parent Employment

The form of competition most commonly associated with declines in home employment 

is that from imports, possibly offset by the gains in employment from exporting. 

The relations of parent employment to imports of services by parents are described in 

Table 10. Imports appear to have a significant influence on parent employment in most 

industries. In every industry but one, the effect seems to be positive, although the service 

imports might be expected to compete with parent service production. The positive relationship 
25 

Table 10 

Coefficients for Imports of Services by Parents (PIM) 

in Regressions for Parent Employment (PE) 

ΔPE = a + bΔ(PIM) 

Industry No. obs. 2

R Coefficient t 

 

All service industries 1070 -0.001 -0.008 0.56 

 Wholesale trade 

 Durable 183 -0.004 0.009 0.49 

 Nondurable 99 0.311 0.550 6.73 

Retail trade 70 -0.009 0.479 0.61 

Transp. & warehousing 59 0.330 0.364 5.43 

Information 130 0.063 0.265 3.12 

Finance & insurance 96 0.190 -0.207 4.82 

Real estate, rental, & leasing 37 0.897 0.331 17.77 

Prof., sci., & tech. services 208 0.245 0.067 2.51 

 Legal 22 -0.050 0.003 0.02 

 Arch., eng. & related 36 0.233 0.172 3.41 

 Comp. systems design 53 0.105 0.053 2.66 

 Manage., sci. & tech. serv. 31 0.366 0.623 4.28 

 
26 

is not unexpected for the Wholesale and Retail trade industries, and Transportation and 

warehousing, which are not primarily engaged in production competing with service imports but 

in the distribution or servicing of goods imports. The Real estate, rental, and leasing imports 

may represent services related to foreign-owned property. However, the positive relationships 

extend to more purely service industries, implying complementarity rather than competition with 

domestic service production. The one negative coefficient is for Finance and insurance. 

Exports of services represent demand for parent labor input, and the expected positive 

relationship between changes in exports and in employment is exhibited in Table 11. All the 

significant coefficients are positive. 

The effects of the combination of trade and overseas production by parent firms are 

explored in Table 12. 

Changes in affiliate employment in developed countries were positively related to 

changes in parent employment in every industry, significantly in Wholesale trade in durables, 

Retail trade, Finance, Computer systems design, and Management, scientific, and technical 

services. Affiliate employment in developing countries more frequently was negatively related to 

parent employment, significantly in Wholesale trade in nondurables and in Retail trade, and in 

several groups of Professional, scientific, and technical services, although the coefficients were 

never statistically significant. 

Parent exports were positively related to parent employment, as expected, whenever the 

relationships were statistically significant. Parent imports were negatively related to 

employment in Wholesale trade in durables and Finance and insurance, but positively related to 

parent employment in five other industries, including Computer systems design and 

Management, scientific, and technical services, as well as marginally significantly in Information, 

industries thought to be suffering from import competition. 

 
27 

Table 11 

Coefficients for Exports of Services by Parents (PEX) 

in Regressions for Parent Employment (PE) 

ΔPE = a + bΔ(PEX) 

Industry No. obs. 2

R Coefficient t 

 

All service industries 1070 .038 .168 6.56 

 Wholesale trade 

 Durable 183 .545 .192 14.79 

 Nondurable 99 .225 .479 5.43 

 Retail trade 70 .269 2.615 5.14 

 Transp. & warehousing 59 .185 .461 3.77 

 Information 130 .190 .199 5.59 

 Finance & insurance 96 .073 .035 2.9 

 Real estate, rental, & leasing 37 -.006 .358 0.89 

 Prof., sci., & tech. services 208 .127 .027 5.57 

 Legal 22 .080 .004 1.68 

 Arch., eng. & related 36 .632 .071 7.82 

 Comp. systems design 53 .050 .003 1.94 

 Manage., sci. & tech. serv. 31 .117 .030 2.23 

 
28 

Table 12 

Coefficients for Parent Exports (PEX) and Parent Imports (PIM) of Services 

and for Affiliate Employment in Developed (AEA) and Developing (AEB) Countries 

in Regressions for Parent Employment (PE), 1999-2004 

Industry No. obs. 2 R Affiliate Employment 

 Developed 

Countries 

Developing 

Countries Exports 

 Coefficient t Coefficient t Coefficient All service industries 1070 .324 .972 17.59 .004 .03 .112 5. Wholesale trade  Durable 183 .578 1.17 3.42 -.119 .97 .194 15 Nondurable 99 .342 .259 0.95 -.295 2.34 .116 . Retail trade 70 .640 2.64 4.51 -6.64 2.34 -1.106 1. Transp. & warehousing 59 .334 .744 1.73 -.514 1.14 -.080 . Information 130 .268 .265 .64 .924 .85 .147 3. Finance & insurance 96 .416 1.03 3.28 .891 3.33 .017 1. Real estate, rental, & leasing 37 .892 .024 .05 -.039 .04 .148 1. Prof., sci., & tech. services 208 .161 .369 2.81 .046 .26 .024 4. Legal services 22 .098 1.13 1.74 -2.34 1.27 .005 1. Arch., eng. & related 36 .740 .241 .67 .611 3.61 .068 6. Comp. systems design 53 .271 .414 3.41 -.295 1.53 .002 1. Manage., sci. & tech. serv. 31 .601 .985 3.00 -.609 1.20 .028 2.
29 

FDI, Trade, and U.S. Wages

 Aside from effects on employment, imports of services may also tend to reduce, or 

prevent increases in, wages in U.S. service industries, if they competed mainly with the more 

skilled domestic operations, or they might raise average domestic wages if they tended to 

substitute mainly for lower-skill domestic production. The alternative possibilities are tested in 

Table 13, which relates changes in service industry parent wages to parent imports. 

In a way a negative effect of imports on average wages is confirmed. In every service 

industry but three, a rise in imports is associated with a fall in average wage levels. However, 

with one exception, the coefficients are mostly far from statistical significance. 

The main exception, the only significant positive coefficient, and in fact the only 

significant coefficient at all, is for Retail trade, Retail trade is the largest employer among parent 

firms in service industries, accounting for almost 40 percent of employment in the industries 

covered in our analysis. Retail trade is also, and by far, the lowest paying industry, with 

average compensation less than half that in all covered service industry firms. One reason for 

that exception in the sign may be that the service imports by the retail trade parents are mostly 

not competitive with parent employment, but are services associated with purchases of goods 

for resale, and are therefore complementary to parent employment in retail trade (In 2004, for 

example, of total sales of $9.830 million by affiliates to parents in retail trade, $9,202 million 

were of goods (U.S., Bureau of Economic Analysis, 2008, Table III.F21, p. 159). 

Parent firm wages are related to parent exports of services in Table 14. A positive 

relationship might be expected on the ground that a rise in exports represents a rise in the 

demand for labor in the parent firms. However, there are no significant coefficients, except a 

marginally significant one in Wholesale trade in durables, and the insignificant ones are more 

often negative than positive, suggesting some shift toward exporting services produced by lessskilled labor. 
30 

Table 13 

Coefficients for Change in Parent Imports of Services (PI) in Equations for 

Change in Parent Average Wage (PW), 1999-2004 

PW = a +b (PIM) 

Industry No. obs. Coefficient t 2

R 

 

All service industries 983 -0.019 0.33 -0.001 

 Wholesale trade 

 Durable 182 -0.132 0.88 -0.001 

 Nondurable 95 -0.631 0.40 -0.009 

 Retail trade 70 0.736 2.46 0.068 

 Transp. & warehousing 57 -0.601 0.99 -0.000 

 Information 129 -0.038 0.20 -0.008 

 Finance & insurance 89 0.092 0.06 -0.011 

 Real estate, rental, & leasing 30 -0.940 1.24 0.018 

 Prof., sci., & tech. services 198 -0.049 0.13 -0.005 

 Legal serv. 22 -0.889 0.07 -0.050 

 Arch., eng. & related 35 -0.232 0.63 -0.018 

 Comp. systems design 53 -0.227 0.60 -0.012 

 Manage., sci. & tech. serv. 29 -1.127 0.13 -0.036 

 
31 

Table 14 

Coefficients for Change in Parent Exports of Services (PEX), 

In Equations for Change in Parent Average Wage (PW) 

1999-2004 

ΔPW = a + bΔ(PEX) 

Industry No. obs. 2

R Coefficient t 

 

All service industries 983 -.001 -.072 .69 

 Wholesale trade 

 Durable 182 .013 -.292 1.84 

 Nondurable 95 -.007 -.913 .57 

 Retail trade 70 -.001 .229 .97 

 Transp. & warehousing 57 .012 -1.308 1.31 

 Information 129 -.001 -.078 .90 

 Finance & insurance 89 -.004 -.316 .80 

 Real estate, rental, & leasing 30 -.035 -.922 .17 

 Prof., sci., & tech. services 198 .001 .081 1.10 

 Legal serv. 22 -.049 -.022 .11 

 Arch., eng. & related 35 -.016 -.065 .68 

 Comp. systems design 53 -.019 .003 .11 

 Manage., sci. & tech. serv. 29 -.033 .199 .34 

 
32 

The combined effect of exports and imports on parent wages is examined in Table 15. 

The one significant coefficient, for parent imports, is for parents in retail trade. It is a positive 

one, suggesting a shift toward higher average skill, presumably complementary with the 

services imported with the goods imported for resale. For wholesale trade in durables, there is 

a negative and almost significant coefficient for parent exports. As in the separate equations for 

exports and imports of services, negative coefficients were predominant, but not statistically 

significant. 

In Table 16, the relationship with parent imports and exports is examined for low-skill 

and high-skill parent firms separately. There are very few significant impacts of trade on parent 

wages to describe. One is in higher-skill firms in Architectural, engineering, and related 

services, where both imports of services are associated with significant decreases in average 

parent wages. Since both import and export growth are associated with higher employment in 

this industry (Tables 10 and 11), it appears that the employment growth in this industry favored 

lower-skilled workers, at least in the higher-skill firms. Growth in imports apparently favored 

lower –skill workers also in Wholesale trade in nondurables among relatively low-wage firms, 

while it led to higher employment overall, and growth in exports was associated with average 

parent wage declines in Wholesale trade in durables. However, the most typical result is of no 

significant effect of increases in exports or imports of services on average parent wage levels. 

Table 17 shifts attention to the impact of employment abroad by affiliates of U.S. 

multinational service firms on the parent firms’ average wages at home. For parent firms in 

Wholesale trade in durables, expansions in developing countries moved parents to higher 

average wages at home, presumably reflecting a shift toward higher skill, but expansions in 

developed countries were associated, in a marginally significant fashion, with lower wages, and 

presumably less skilled labor forces, at home. The only other significant relationship was for 

firms in Architectural, engineering, and related services. In that industry, affiliate employment 
33 

Table 15 

Coefficients for Change in Parent Imports (PI) and Exports (PEX) of Services 

in Equations for Change in Average Parent Wage Change (PW) 

1999-2004 

ΔPW = a + b(ΔPIM) + cΔ(PEX) 

 Parent Imports Parent Exports 

Industry No. Obs. 2

R Coefficient t Coefficient t 

 

All service industries 983 -.002 -.017 .30 -.071 .67 

 Wholesale trade 

 Durable 182 .009 -.081 .53 -.275 1.70 

 Nondurable 95 -.018 .189 .07 -1.064 .41 

 Retail trade 70 .055 .712 2.24 .059 .25 

 Transp. & warehousing 57 -.006 -.120 .14 -1.173 .85 

 Information 129 -.009 .015 .07 -.080 .88 

 Finance & insurance 89 -.015 -.325 .21 -.344 .82 

 Real estate, rental, & leasing 30 -.018 -.936 1.20 -.344 .06 

 Prof., sci., & tech. services 198 -.003 -.203 .50 .093 1.20 

 Legal services 22 -.105 -.608 .05 -.020 .10 

 Arch., eng. & related 35 -.046 -.123 .26 -.045 .36 

 Comp. systems design 53 -.032 -.242 .63 .006 .22 

 Manage., sci. & tech. serv. 29 -.071 -1.497 .17 .211 .35 

 
34 

Table 16 

Coefficients for Change in Parent Imports (PI) and Exports (PEX) of Services 

in Equations for Change in Average Parent Wage (PW), 

for High-Wage and Low-Wage Parents, 

Δ(PW) = a + bΔ(PI) + cΔ(PEX) 

 High-Wage Parents (Average at Median or Above) 

 Imports Exports 

Industry No. Obs. 2

R Coefficient t Coefficient t 

 

All service industries 489 -0.004 0.003 0.03 -.068 0.44 

 Wholesale trade 

 Durable 124 0.027 -0.104 0.72 -0.348 2.09 

 Nondurable 56 -0.020 6.185 0.93 -7.588 0.96 

 Retail trade 35 0.103 1.141 1.85 0.082 0.12 

 Transp. & warehousing 29 0.000 0.063 0.05 -3.033 1.20 

 Information 67 -0.028 0.117 0.25 -0.057 0.42 

 Finance & insurance 44 -0.041 -1.152 0.33 -0.372 0.56 

 Prof., sci., & tech. services 124 -0.001 -0.102 0.22 0.129 1.39 

 Arch., eng. & related 21 0.212 -17.761 2.62 -9.316 2.65 

 Comp. systems design 45 -0.038 -0.211 0.55 0.011 0.39 

 Manage., sci. & tech. serv. 21 -0.100 -2.057 0.21 0.264 0.39 

 

 Low-Wage Parents (Average Below Median) 

All service industries 494 -0.001 -0.123 1.13 -0.072 0.54 

 Wholesale trade 

 Durable 58 -0.014 0.694 0.98 -0.440 0.99 

 Nondurable 39 0.164 -5.444 2.81 -0.188 0.17 

 Retail trade 35 -0.042 -0.163 0.70 -0.041 0.33 

 Transp. & warehousing 28 -0.009 -0.905 1.32 1.004 1.14 

 Information 62 -0.016 -0.031 0.16 -0.101 0.88 

 Finance & insurance 45 -0.014 -0.008 0.02 -0.466 1.03 

 Prof., sci., & tech. services 74 -0.022 0.551 0.59 -0.026 0.17 

 
35 

Table 17 

Coefficients for Change in Affiliate Employment in Developed and Developing Countries 

in Equations for Average Parent Wage Change 

Industry No. 

obs. 

2

R Affiliate Employment 

 Developed 

Countries 

 Developing 

Countries 

 Coefficient t Coefficient t 

 

All service industries 983 -.002 -.016 .06 -.029 .31 

 Wholesale trade 

 Durable 182 .029 -8.174 1.91 3.382 2.25 

 Nondurable 95 -.022 .682 .13 .241 .10 

 Retail trade 70 -.009 -.343 1.13 1.948 1.17 

 Transp. & warehousing 57 -.035 .692 .21 -1.258 .31 

 Information 129 -.009 -.850 .89 2.238 .88 

 Finance & insurance 89 -.023 2.199 .17 -1.196 .12 

 Real estate, rental, & leasing 30 -.068 -3.915 .21 14.165 .33 

 Prof., sci., & tech. services 198 -.010 .229 .11 .522 .19 

 Legal services 22 -.099 -16.391 .29 40.079 .31 

 Arch., eng. & related 35 .131 10.105 2.60 -.657 .35 

 Comp. systems design 53 -.026 -.026 .01 -2.855 .71 

 Manage., sci. & tech. serv. 29 -.062 10.606 .61 2.702 .06 

 
36 

contracted, on average, and contractions of employment in developed countries were 

associated with skill downgrading in parents at home, as reflected in lower average wages. 

The relations of parent wages to the combination of changes in trade and in employment 

in affiliates is examined in Table 18. Imports of services are associated with increases in 

average wages in Retail trade, but there are no other significant relationships. Exports of 

services appear to be associated mainly with declines in average wages, but none of these 

relationships is statistically significant. Increases in affiliate employment in developed countries 

in Retail trade and, marginally significantly, in Wholesale trade in durables, are associated with 

declines in parent average wages, while in Architectural, engineering, and related services, 

growth in affiliate employment is accompanied by higher average parent wages. 

The nature of the overseas expansions of employment is examined separately for 

higher-skill firms and lower-skill firms, distinguished by their wage levels in 1999 relative to 

industry medians, in Table 19. A significant relation observed for the high-skill parent firms is in 

the Information industry. In that industry, parent expansions in developed countries were 

associated with increases in average parent wages. Expansions in developing, presumably 

low-wage countries led to reductions in average parent wage rates, although the coefficient is 

not statistically significant. In Computer systems design, there is also a negative effect on 

parent wages from expansions in low income countries. In Retail trade, expansions in both 

types of countries were associated with low wage changes. Among low-wage parents, the only 

significant coefficient was for those in Professional, scientific, and technical services, who had 

above average wage gains from increases in employment in developed countries. 

 The clearest relations to wage gains were in Information and Computer systems design, 

where, for relatively high-wage employers, expansion in developed countries was associated 

with upward movements in average wages and expansions in developing countries with 

downward or slower upward average wage changes. The associations may have been in the 

selection among investing firms, with those upgrading their labor forces expanding in developed 
37 

Table 18 

Coefficients for Changes in Affiliate Employment in Developed (ΔAEA) and Developing (ΔAEB) Cou

Change in Parent Exports (ΔPEX) and Imports (ΔPIM) of Services in Equations for Change in Average Par

ΔPW = a + b(ΔAEA) + c(ΔAEB) + d(ΔPEX) + e(ΔPIM) 

Industry No. obs. 2 R Affilia

 Imports Exports Developed 

 Coefficient t Coefficient t Coefficient All service industries 983 -.003 -.014 .25 -.068 .64 -.006 . Wholesale trade  Durable 182 .033 -.020 .13 -.251 1.56 -7.418 1. Nondurable 95 -.040 .264 .10 -1.206 .45 1.040 . Retail trade 70 .087 .638 1.99 .545 1.40 -.773 2. Transp. & warehousing 57 -.025 .147 .17 -2.154 1.26 3.884 . Information 129 -.018 -.071 .31 -.069 .72 -.929 . Finance & insurance 89 -.038 -.539 .30 -.383 .88 4.772 . Real estate, rental, & leasing 30 -.092 -.953 1.17 -.295 .05 -.782 . Prof., sci., & tech. services 198 -.013 -.205 .50 .093 1.19 -.326 . Legal services 22 -.222 .038 .00 -.078 .26 -17.281 . Arch., eng. & related 35 .173 .062 .14 -.187 1.56 12.768 3. Comp. systems design 53 -.057 -.287 .72 .007 .23 .200 . Manage., sci. & tech. serv. 29 -.112 -10.306 .82 .348 .56 25.065 1.
38 

Table 19 

Coefficients for Changes in Affiliate Employment in Developed (ΔAEA) and Developing (ΔAEB) Countrie

in Equations for Change in Average Wage (ΔPW) for Parents Above and Below Median Wag

ΔPW = a + b(ΔAEA) + c(ΔAEB) 

 Parent 1999 Average Wage Above or Equal Median Parent 1999 Average 

Industry 

No. 

obs. 2 R 

Coefficient for 

Employment in t No. obs. 2 R Coef

Emp

A B A B A 

All service industries 489 -0.001 2.578 0.439 1.24 0.19 494 -0.002 -0.060  Wholesale trade  Durable 124 -0.003 -5.748 1.134 1.17 0.76 58 0.245 -11.68 Nondurable 56 -0.030 -6.503 -5.314 0.27 0.55 39 -0.031 1.463  Retail trade 35 -0.050 -0.149 1.818 0.03 0.40 35 0.041 -0.339  Transp. & warehousing 29 -0.070 -4.126 8.362 0.32 0.40 28 0.004 1.101  Information 67 0.300 28.407 -6.848 5.18 1.18 62 -0.001 -1.147  Finance & insurance 44 -0.048 -5.652 -5.575 0.10 0.09 45 -0.044 -0.535  Prof., sci., & tech. services 124 -0.009 -1.294 5.785 0.46 0.96 74 -0.027 -0.490  Arch., eng. & related 21 0.345 -1.444 -20.707 0.24 3.26  Computer systems design 45 -0.044 0.488 -3.047 0.16 0.36  Manage., sci. & tech. serv. 21 -0.110 -2.624 5.983 0.11 0.05 

A = Developed countries B = Developing countries 
39 

countries and those reducing skill levels expanding in low-income countries, or the different 

types of expansion may have required different complementary employment needs at home. In 

any case, few of the employment expansions outside of the computer-related services produced 

significant wage movements. 

Concluding Remarks

 The category of service industry firms is a very broad one, ranging from firms selling 

principally goods, in the Wholesale and Retail trade and Transportation and warehousing 

industries, to firms in the Information and Computer systems design sectors, selling mostly 

services, where the location of production and the nature of exports and imports is ambiguous 

and much of production and trade are intangible. It is not likely that there will be any uniform 

response of employment and wages among such a varied group of industries, and for that 

reason, the emphasis here has been on the variety of experience rather than a single summary. 

However, since there has been concern about the prospects for service industries as a whole, a 

summary of the aggregate findings is of some interest. 

 With respect to changes in employment in service industry multinationals as a whole, 

expansions in employment in foreign affiliates of U.S. multinationals have been accompanied by 

expansions in employment in the United States, with the one exception that growth in 

employment in developed countries among affiliates of firms paying relatively high wages in the 

United States was negatively related to growth at home, while growth in employment in 

developing countries went along with growth in employment at home. Growth in parent exports 

was associated with growth in home employment, while there was no relationship with growth in 

imports. 

With respect to impacts on parent average wages, no combination of variables produced 

any significant relationship suggesting an effect on the skill composition of firms’ labor forces. 
40 

Looking across individual service industries, one finds almost no negative relations of 

parent employment to the growth of foreign operations among the higher wage service 

industries: Information, Professional scientific, and related services, and Finance and insurance, 

except one showing a negative coefficient for the Professional services of expansions in 

developing countries, while there was a positive coefficient for affiliate expansions in developed 

countries. The effects of foreign affiliate employment growth on parent employment were 

mostly positive also among the lower-wage industries, although there were a few negative 

relations with overseas growth in Wholesale trade. Growth in both exports and imports was 

associated with growth in home employment among the higher –wage industries, with the 

exception of Finance and Insurance, in which the growth of imports was associated with 

declines in home employment. Among the lower-wage industries, while there were more 

positive than negative associations between imports and employment, there were several 

negative coefficients for exports in Retail trade and a couple for imports or affiliare expansion in 

Wholesale trade. 

Effects on parent wages, which are interpreted as changes in the skill composition of 

employment, since the data used here do not permit following individual workers over time, are 

mostly insignificant among the higher-wage service industries. One exception is in the subindustry, Architectural, engineering, and related services, which reported negative relations 

between both imports and exports and changes in parent wages, and negative effects on highwage firms in the industry of expansions in developing countries. Among the relatively lowwage industries, there were very few significant coefficients relating parent wages to affiliate 

employment or trade, but in Wholesale trade, most of the marginally significant coefficients were 

negative, indicating shifts toward lower average skill. That result matches the fact that the 

Wholesale trade had one of the lowest increases in average industry wage among the industries 

in this study. 
41 

It is in two intangible services, Information and Computer systems design that the effects 

of trade and international investment seem the clearest. The two industries changed differently 

in the five years with the Information industry contracting in the U.S. and as an object for 

investments by foreign firms in the United States and U.S. investment abroad, possibly from 

contraction in the Broadcasting part of the industry. Computer systems design employment 

among U.S. parents and in U.S. industry as a whole also declined, but employment abroad by 

U.S. firms and employment in the United States by foreign firms both rose by more than 50 

percent, signaling some international diffusion of the knowledge basis of the industry. Both 

industries’ firms added to U.S. employment in developed countries, but in Computer systems 

design employment contracted in firms expanding in low-income countries. In both industries, 

larger parent imports were associated with higher parent employment. In Information, highwage parent that invested in high-income countries grew in grew in the United States, while 

low-wage firms grew faster if they invested in low-wage countries. In both industries, larger 

parent employee wage gains were associated with investment in developed countries and 

smaller ones with investments in developing countries. 

Other industries did not follow such consistent paths. The responses of Wholesale and 

Retail trade firms reflected their heavy involvement in trade in goods, rather than services. In 

general larger increases in foreign employment were associated with larger increases in 

domestic employment, a little more consistently for growth in developed countries than for 

expansions in developing countries. 

Wage effects of foreign involvement were less favorable to employees than the 

employment effects. A high proportion of wage effects of foreign expansion were negative, 

although few were statistically significant. Two that were significant took place in firms with 

above average wage levels investing in developed countries, in Retail trade and Information and 

for Computer design firms investing in low-income countries, and for firms with low wage levels 

in Professional, etc. industries investing in low-income countries. 
42 

The failure to observe many strong associations between changes in various forms of 

foreign activity and changes in employment and wages is not uncommon, although few studies 

have much information on service industries and their investment abroad and trade. The multicountry OECD study (OECD, 2007), ended with a list of difficulties, rather than a finding, citing 

the lack of data in many countries, the difficulty of measuring positive effects of imports, and 

translation of the benefits of imports into effects on employment. I would add the vagueness of 

the definition and measurement of trade in services, the high intangible content of production, 

and the difficulty of knowing where production is taking place, in a world of cheap and rapid 

communication. 

To a somewhat surprising degree, the results here for service industries mirror the 

findings for the effects of imports and exports and foreign affiliates’ operations on wages and 

employment of workers in various occupations in manufacturing industries in Ebenstein et al. 

(2009), although that study deals with manufacturing, rather than services, with workers 

classified by occupation, rather than by industry of employer, with a longer period, 1982-2002, 

rather than 1999-2004, and with a much more sophisticated model of wage determination. The 

parallels include a stronger effect of trade with or operations in developing, as compared with 

developing countries, and effects of exports similar to those of imports, and the bias of change 

in favor of more educated workers. 
43 

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___________ (2010), “Service Offshoring and White-Collar Employment,” Review of Economic 

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44 

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45 

APPENDIX A 

Exits and Entrances 

Following the employment changes in a fixed set of firms, as we do here, omits changes that 

take place from the exits of firms in existence at the beginning of the period observed, and from 

the entrance of new firms. It is plausible that the firms that survive, especially if the period is 

long, are not typical of either group, and that their employees’ experience is also not typical. 

 In Table A1, we compare the number and U.S. operations of exiting firms with those of 

the universe of surviving ones. 37 percent of the firms that were in each industry in 1999 exited 

in the five following years, although the shares was a bit under a third if firms that merged with 

continuing ones are not treated as exits. That would seem to be the appropriate measure since 

the firms and their employees remained in the sample being studied. The shares of exiting 

firms were much smaller, under 10 percent overall, if measured by employment or sales, 

indicating that it was the smaller firms that accounted for the majority of exits. However, the 

exiting shares varied among industries; those in most groups, excluding those preserved in the 

panel by mergers, were 5-7 percent, but in Professional, scientific, and technical services they 

were 19 percent for employment and 16 percent for sales. 

 Table A2 shows that the number of entering firms was about equal to the number 

exiting, relative to the total number in 2004. The entering firms in most of the industries were 

smaller than the continuing firms, but not by as much as the exiting firms. However, in Finance , 

insurance, and real estate, the entering firms were larger, as measured by employment, than 

the continuing firms. 

 Measured by the activities of their foreign affiliates, exiting firms were less important than 

they appeared measured by parent activities, as can be seen in Table A-3. Exiting parent firms, 

which were 32 percent of the number of parents, held about 5 percent of the number of foreign 

affiliates and accounted for about 5 percent of the affiliates’ employment. Entering firms, 
46 

described in Appendix Table A-4, added 9 percent to the population of foreign affiliates and 11 

percent to their affiliate employment, up to as high as 33 per cent in Finance, insurance, and 

real estate. 
47 

Table A1 

Exiting U.S. Service Industry Parents, 1999-2004, as Percent of Surviving Parents, 1999 

Industry* Number Empl. Sales 

 Total In U.S. Abroad Goods Services 

All service industries 37(32) 14(9) 13(7) 12(7) 18(13) 9(7) 16(9) 

 Trade, Transp., & warehousing 33(29) 10(7) 12(9) 11(9) 22(19) 9(7) 26(22) 

 Information 44(36) 18(5) 19(4) 19(4) 18(3) 2(6) 19(4) 

 Finance, insurance, & real est. 33(28) 13(5) 9(3) 9(3) 12(8) 4(12) 10(4) 

 Prof., sci. & tech. services 41(37) 24(19) 21(16) 22(17) 16(10) 4(2) 26(21) 

 Manage., Admin., & Support 37(34) 15(14) 13(9) 12(9) 2(0) 0(2) 12(10) 

 Other services 40(37) 15(12) 9(6) 9(6) 7(6) 10(13) 9(6) 

Figures in parentheses omit firms that exited via mergers with surviving firms.
48 

 Table A2 

Entering U.S. Service Industry Parents, 1999-2004, as Percent of Surviving Parents, 2004 

Industry Number Empl. Sales 

 Total In U.S. Abroad Goods Services

All service industries 33(32) 19(17) 19(17) 18(16) 31(25) 11(10) 15(13) 

 Trade, Transp. & warehousing 21(19) 10(10) 12(12) 12(12) 21(19) 11(10) 23(22) 

 Information 42(41) 13(13) 12(11) 12(10) 19(14) 19(9) 11(11) 

 Finance, insurance, & real est. 45(44) 51(43) 34(29) 33(29) 40(32) 18(18) 15(13) 

 Prof., sci. & tech. services 38(36) 22(18) 18(15) 18(16) 12(9) 2(2) 20(17) 

 Manage., Admin., & Support 32(31) 10(10) 7(7) 7(7) 7(7) 0(0) 7(7) 

 Other services 32(29) 10(8) 9(7) 9(7) 8(6) 7(2) 9(8) 

Figures in parentheses exclude firms that entered by merger with an existing or exiting firm. 
49 

Table A3 

Foreign Affiliates of Exiting Service Industry Parents, 1999-2004, 

as Percent of Affiliates of Surviving Parents in 2004 

Industry

Sales 

 Total Goods Services Employment Value Added 

All service industries 10(5)b 11(7) 9(4) 11(5) 8(4) 

 Trade, Transp. & warehousing 13(9) 13(10) 10(4) 9(5) 12(5) 

 Information 11(1) 3(0) 12(1) 16(1) 11(1) 

 Finance, insurance, & real est. 6(1) 5(3) 4(1) 9(2) 0(1) 

 Prof., sci. & tech. services 7(4) 0(0) 11(7) 11(6) 8(5) 

 Manage., Admin., & Support 10(7) 11(5) 10(8) 14(12) 8(7) 

 Other services 11(3) 69(18) 5(2) 5(2) 9(3) 

 

b

 Figures in parentheses omit firms that exited via mergers 

 with surviving firms. 
50 

Table A4 

Foreign Affiliates of Entering Service Industry Parents, 1999-2004, 

as Percent of Affiliates of Surviving Parents in 2004 

Industry

Sales 

 Total Goods Services Employment Value Added 

All service industries 13(9)b 8(7) 11(9) 13(11) 8(7) 

 Trade, Transp. & warehousing 8(7) 7(6) 13(10) 7(6) 7(6) 

 Information 13(10) 11(11) 15(10) 16(13) 16(9) 

 Finance, insurance, & real est. 23(13) 55(41) 14(11) 39(33) 8(8) 

 Prof., sci. & tech. services 6(5) 1(1) 9(8) 11(9) 7(6) 

 Manage., Admin., & Support 6(6) 12(12) 4(4) 8(8) 6(6) 

 Other services 8(7) 21(14) 7(6) 5(2) 4(3) 

 

 b

 Figures in parentheses omit firms that entered via mergers 

 with surviving or exiting parents.