Turning our attention to the international trade literature, this paper is related to existing studies on the nexus between stringent domestic labor market policy and offshoring activities. In the international trade literature, high labor costs due to a high minimum wage and frictions in the domestic labor market are commonly perceived as drivers of task offshoring and outward foreign direct investment (FDI). Although the literature has actively investigated the economic consequences of those international activities (offshoring and outward FDI), which and how domestic labor market policies or shocks at home could trigger them has been relatively under-explored empirically. The few exceptions include studies by Gan et al. (2016) and Fan et al. (2018). Gan et al. (2016) found that export market participation by Chinese firms weakened after a continuing rise in the minimum wage, likely reflecting China’s loss of external competitiveness due to an increase in labor costs. Fan et al. (2018) found that a minimum wage increase promotes outward FDI by Chinese firms. Our paper’s focus is quite close to, but distinct from, that of Fan et al. (2018) in that they investigated the extensive margin channel by which firms establish new foreign affiliates in response to minimum wage increases, whereas we focus on the labor reallocation channel at the intensive margin through _existing_ foreign affiliates. Another notable difference is that Fan et al. (2018) consider medium-run responses of domestic firms to the minimum wage increase over a 12-year sample period, while our primary focus is on the immediate, short-run responses (i.e., about three years after a minimum wage increase) of MNCs that have already set up foreign affiliates.

Last but not least, our study complements previous research on multinational labor substitution in the international trade literature. For example, Muendler and Becker (2010) assess how the wage differential between home and abroad affects German MNCs’ demand for labor and find significant labor substitution between headquarters and foreign affiliates at both the intensive and extensive margins;<sup>6</sup> Harrison and McMillan (2011) use US firm-level data to identify the labor substitution channel such that offshoring to low-wage countries substitutes for domestic employment.<sup>7</sup> Here, we investigate the labor substitution channel through MNCs’ internal networks (i.e., the intensive margin), but break new ground on this important channel by exploiting unanticipated labor market policy changes to identify the mechanism.<sup>8</sup>

> 6Muendler and Becker (2010) categorized two critical margins of multinational labor substitution whereby an MNC’s labor demand responds to international wage differentials (1) at the extensive margin, when the MNC enters a foreign market; and (2) at the intensive margin, when the MNC operates through existing foreign affiliates.

> 7Harrison and McMillan (2011) also explored a complementary effect such that for firms that do significantly different tasks at home and abroad, foreign and domestic employment are complements. They found that the overall effect is a small decline in manufacturing employment.

8Several other earlier studies failed to find any impact on home employment through MNC operations 4