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Trade and foreign direct investment (FDI) are central to the process of globalization. Over the last 50 years, advocates of greater trade and FDI liberalization have been guided by the notion that removing barriers to both stimulates economic growth. An extensive body of work using newly available micro-data files has emerged comparing the productivity levels of exporters against those of non-exporters, and of foreign-controlled firms against those of domestic firms. With few exceptions, this work shows that exporting and foreign-controlled plants are significantly more productive though the direction of causality between internationalization and productivity remains a point of contention.
Many of these empirical studies also document important differences in how exports and FDI affect other plant-level performance measures. In particular, growing attention is given to the existence of exporter and foreign-control wage premiums. The question this finding begs is why exporters or foreign-controlled firms pay their workers higher wages than do non-exporters or domestic-controlled firms. On the one hand, this may relate to firm characteristics. For instance, it may be because exporters or foreign-controlled plants tend to be larger in size, and size is positively associated with wages. On the other hand, an exporter (or foreign-controlled firm) may be paying higher wages because it is employing more skilled workers. In other words, it may be hiring workers with a different set of individual characteristics (i.e., age, education, etc.), which are also important determinants of wages.
This paper documents the existence of exporter and foreign-control wage premiums in Canada and investigates whether or not these premiums reflect differences in firm characteristics and/or in the quality of labour, at both a national and a regional level of analysis. To the best of the authors' knowledge, no study has addressed these issues simultaneously in the Canadian context. The authors are able to do so by developing a novel employer-employee dataset that combines detailed information on manufacturing plants and the characteristics of their workers.
Four main findings emerge from the analysis.
First, there are clear benefits to working in an exporting or foreign-controlled establishment. Results from plant-level regressions controlling exclusively for a plant's export and foreign-control status reveal that exporters pay, on average, wages that are about 14% higher than those paid by non-exporters, and that foreign-controlled plants pay wages that are about 30% higher than those paid by domestic-controlled plants.
Second, these wage premiums appear to be in large part attributable to other plant characteristics. Adding controls for plant size, capital intensity, and multi-unit-firm status reduces the wage differentials in exporters to about 6% and in foreign-controlled plants to 19%.
Third, adding controls for individual worker characteristics further reduces the wage premiums observed, but only slightly. Furthermore, such controls do not purge the statistical significance of the export and foreign-control status of plants. In other words, the export and foreign-control wage premiums do not disappear after controlling for individual worker characteristics. These results hold at the national level.
Fourth, and perhaps most interesting, is the variation found in export wage premiums across regions. In contrast to Quebec and British Columbia, where exporters pay, on average, higher wages for identical workers, the export wage premium in Ontario is substantially smaller and disappears completely after controlling for other plant and worker characteristics. Such a finding for Ontario may be related to differences in the organizational and structural characteristics of plants as well as to the destination of goods exported.
In the end, the results presented in this paper suggest that a large portion (45% to 60%) of the raw export and foreign-control wage premiums can be attributed to plant and worker characteristics. However, the fact that significant wage premiums remain also points to the need for further analysis. For instance, it may be that important plant-level characteristics have not been taken into account in our models. In particular, one limitation of the Annual Survey of Manufactures is that it does not distinguish between foreign-control and multinational-corporation status. It may also be that there are unobserved worker skills that have not been taken into account. Or, if plants gain productivity through export-based learning, these productivity gains may be passed on to workers in the form of higher wages as the learning is likely embedded in the workers themselves. Therefore, a fuller understanding of the remaining export and foreign-control wage premiums rests on developing longitudinal data that provide even more detailed information on both workers and firms and on the evolution of these characteristics over time.