749 - International Rent Sharing and Domestic Labour Markets: a Macroeconomic Analysis

Wetenschappelijke publicatie
Date 1 November 2003

Foreign subsidiaries account for a significant part of output in many industrialised countries. However, compared to international trade, relatively little is known about the role of foreign direct investment (FDI) and multinational firm behaviour in the transmission of disturbances from one country to the next. Inspired by the micro-evidence on profit sharing within multinational corporations and within industries, we investigate whether a cross-border rent-sharing phenomenon can be identified at the macro-level. The rent-sharing hypothesis implies that an increase in foreign profitability should boost wages and/or employment in the domestic economy. Our empirical study provides evidence that international rent sharing might be an important aspect of global economic linkages. Especially in continental Europe and the UK, labour market conditions (wages and/or employment) are significantly affected by profitability conditions abroad. The US labour market, on the other hand, does not appear to be sensitive to changes in profitability in other countries, which could be explained by the still relatively modest role of FDI capital in the American economy. Key words: foreign direct investment, international rent sharing, labour markets JEL codes: E32, F23, F40, J23, J31