# **_C. FDI and knowledge creation_**

Data suggest that multinational enterprises play a major role in creating new knowledge through research — and development (R&D) activities. In 2002, 700 firms—686 of which were multinational corporations<sup>2</sup> accounted for 46 percent of global spending on R&D, and 69 percent of business R&D. Moreover, business R&D was not undertaken solely in the headquarters of multinational corporations. A survey of the world’s top R&D investors found that the average respondent spent 28 percent of its 2003 R&D budget abroad, including in‐house spending by foreign affiliates and extramural spending on R&D contracted to other countries (UNCTAD 2005).

# **_D. FDI, wages and jobs_**

Evidence points to a positive link between FDI and higher wages paid by multinational companies. Although the magnitude of observed differences varies, a large number of empirical studies find that foreign affiliates pay higher wages relative to domestic firms (Heyman, Sjöholm, and Tingvall 2007, and Hijzen and others 2013). A number of explanations have been suggested for this pattern; only a few are highlighted here. Higher wages may be a result of foreign firms “cherry picking” employees (Almeida 2007). Alternatively, they may result from a lack of local knowledge that prevents foreign firms from attracting good workers without paying a wage premium (Lipsey and Sjöholm 2004).

Wage effects can also accrue through bias in FDI toward higher skill levels. There is evidence, for instance, that manufacturing‐related FDI in developing countries favors advanced industrial sectors, and that this bias has been growing. The ratio of FDI flows between higher and lower skill‐intensive activities was roughly 5:1 in 1990‐92, and about 14:1 in 2005‐07 (Moran 2014). These disparities can have short‐ and long‐term effects on average skill levels and wages, particularly in developing economies that manage to tap into middle and higher skill‐intensive supply chains (Javorcik 2014).

Evidence regarding wage spillovers to domestic firms is mixed. Poole (2013) finds positive multinational wage spillovers through worker mobility. When workers leave multinationals and are rehired at domestic establishments, these workers’ wages continue to increase. On the other hand, higher wages from foreign firms may reduce knowledge spillovers arising from labor turnover (Fosfuri, Motta, and Ronde 2001).

Although some evidence suggests that FDI can bring better jobs to host countries, an important question for policy makers is whether FDI creates additional jobs. Research in this area is very limited. However, Lipsey, Sjöholm and Sun (2010) offer views in the context of foreign takeovers. Using a large panel of plants between 1975 and 2005, they find that foreign‐owned Indonesian manufacturing plants grew more rapidly in terms of employment than plants that remained under Indonesian ownership during the same period. Additionally, a foreign takeover of a domestically‐owned plant brings, on average, a large immediate expansion of employment. By contrast, there are no significant effects on employment in shifts from foreign to domestic ownership. Most of the employment effects of foreign takeovers took place in

> 2 This number is out of an approximate total of 70,000 multinational corporations. Therefore, these data might significantly underestimate total R&D spending by multinational corporations.

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