Wage Premium via Education & Gender Difference through Labor Disputes on OFDI in Taiwan ROC.

AuthorLai, Yu-Cheng
PositionOutflow of foreign direct investment


The impact of outflow of foreign direct investment (or outward FDI) on employment in the domestic market may be a well-researched area. The empirical evidence suggests that outward FDI reduces the demand for low skilled labor and highly skilled employees in Italy. (1) But the studies have suggested that if there is likely a reduction in the domestic demand for labor in the short run, it is likely to increase the company's competitiveness in the longer term. The changes in domestic employment imply systematic and flexible adjustments in the labor market. In particular, there shall be a greater supply of higher vocational profiles and the consequent need for additional investment in human capital. (2)

Scholars have argued for and against the notion that a highly regulated labor market creates a positive effect that helps to deter outward FDI (OFDI). According to some, the regulated labor market increases labor productivity because of the improved state of industrial relations and it declines the outflows of FDI (Parcon, 2008). However, scholars from the other camp consider that the regulated labor market deters outflows of foreign capital because it imposes an additional cost. Though a vast literature exists on the effects of labor market regulations and high labor standards on OFDI in home countries (Kokko, 2006), the existing scholarship has a blind spot toward the relationship between the home country's state of industrial relations and the patterns of outflow of foreign investment, a gap that tends to get tilled in this study.

We treated the rate at which the numbers of cases of labor disputes were raised as the indicator of the state of industrial relations. The number of cases of the labor dispute is negatively correlated to a healthy state of industrial relations. We further presumed that labor disputes signify the effects of the changes in regulatory conditions. For instance, there will be a significant improvement in compliance rate after the enactment of strict legislation. Consequently, the improved regulatory conditions will benefit the state of industrial relations and reduce the numbers of cases of labor disputes in due course, or otherwise. Secondly, strict regulation will improve the firms' compliance rate and the quality of manpower. As a result, foreign investors will get attracted to firms that have quality manpower. However, the deteriorating state of industrial relations echoed in the form of an increased number of cases of disputes may compel the domestic firms to invest in a foreign land, thereby increasing the OFDI. Average wage differences between foreign and domestic firms merely reflect differences in the composition of the workforce, wages in foreign-owned firms are 12% higher for production workers and 20% for non-production workers. (3)

Globalization has resulted in blurred international boundaries. Subsequently, there is a growing inclination among multinationals to invest in markets with greater opportunities. The host country makes use of different policies to attract foreign investors. These policies are meant to generate flexible labor market conditions. According to Carstensen and Toubal (2003), the increase in the inflow of FDI is largely attributed to the host countries' market potential and regulatory environment. These factors are so critical that at times a relatively higher labor cost in the host country does not discourage the foreign firms from investing, provided the domestic market maintains high labor standards. However, strong labor standards call for improved labor quality. So, the important question is whether the change in the state of industrial relations and improvement in the quality of labor will have any effect on wages, especially for industries with a high outward stock of FDI.

We believe that the studies that have examined the effect of labor quality and cases of labor disputes on foreign investors have not adequately explained the function of these labor market characteristics in influencing the industries with a high outward stock of FDI. So, we are questioning whether the domestic labor market conditions would matter to the domestic investors while they decide to invest outside the country. Building on the extant literature on the effects of labor market conditions such as predicted wage, quality of labor, and state of industrial relations on the outward flow of FDI, in this study, we measure the effect of changes in the state of industrial relations and quality of manpower on wages for industries with a high outward stock of FDI in Taiwan.

Literature Review & Hypotheses Building

One of our foremost assumptions is that the rise or fall in the cases of labor disputes (our measure of the state of industrial relations) is largely attributed to stringent enforcement of labor regulations. Although the enforcement of labor laws is not our key variable while building the hypotheses we relied on the literary evidence on strict enforcement of labor laws and its direct and indirect relationship with industrial disputes, quality of labor, and the outward stock of FDI in industries.

We reviewed the relationship between demand and supply of quality human resources and strict enforcement of labor laws, and its consequences such as rising or declining number of cases of labor disputes. We presumed that strict enforcement of labor laws would help the foreign firms to attract more educated workers, which would bring about an increase in the supply of quality manpower. Lai and Sarkar (2017) claimed that foreign firms in Taiwan have complied with labor laws more often than their domestic counterparts. As a result, there was an increase in the supply of labor in the domestic market. At the same time, considering all other conditions around to be constant, strict enforcement of labor laws could bring in a reduction in the supply of labor if the growing number of cases of disputes because of strict enforcement of labor laws discourages and prevents quality workforce to participate in the labor market. So, stringent enforcement can increase as well as decrease the supply of quality manpower. We focus here on the supply of quality labor since an abundance of quality human resources in the host country helps in attracting foreign investors.

Concerning the demand for labor, Huang et al (2016), Gao (2005), and Noorbakhsh et al (2001) have observed that the demand for quality manpower in foreign firms increases at a normal pace. Concerning the role of the quality of labor in attracting FDI, the empirical evidence indicates that there is a very high demand for educated skilled manpower among foreign firms. For example, Gao (2005) and Noorbakhsh, Paloni, and Youssef (2001) have noticed a positive role played by the quality of domestic labor in attracting FDI. Gao (2005) found the education level of local Chinese workers to have played a critical role in attracting investment from overseas to China. Labor quality characterized by human capital accumulation was found by Hanushek and Kimko (2000) to have resulted in the host country's economic growth. The quality of the host country's human resources helps in rapid technology transfer from the home country. Sarkar and Lai (2009) have found that the output of domestic firms has got positively influenced by foreign ownership through productivity spillover in India. Rhee and Belot (1990) indicated that multinationals act as a natural channel for the flow of knowledge of the overseas market to domestic firms.

Further, Kan & Lin (2011) and Lai and Sarkar (2016) indicated that the enforcement of labor laws is more effective in large firms in Taiwan and it leads to a reduction in job turnover and an increase in employment stability in these firms. So, we assume that the industry comprising large firms will witness stronger enforcement of the beneficial legislation in comparison to the industries with small and medium-sized firms. Consequently, our hypotheses concerning the effects of changes in demand and supply of quality workforce on their wages will vary between industries depending on the size of the firms in those industries.

With regard to the relationship between the state of industrial relations (number of cases of labor disputes) and inflow or outflow of foreign investment, when cases of labor disputes increase during the peak year(s) of enforcement of stringent labor laws, non-wage cost will rise. However, the rise in cases of labor disputes will improve the wages of educated manpower. Cramton and Tracy (1994), Tcha (1998), and Cramton et al (2008) have suggested that firm-level wage initially escalates when there is a labor dispute and this happens because of the collective agreement between labor and management after workers raise disputes against their employer. Therefore, strong enforcement of labor laws, which may get reflected in the rise of cases of labor disputes, will overall increase the cost (wage plus non-wage) of hiring an educated workforce, making it more than what the foreign firms usually pay for educated labor. Consequently, it will result in a reduction in the hiring of educated labor and a subsequent drop in FDI too. Hence, the effect of regulation on the labor market for an educated workforce, especially in the MNC, depends on the changes in demand and supply of an educated workforce.

Therefore, based on the above discussion, we built the following three hypotheses:

H1: Educated young workers are more likely to get hired by the MNC, though the same is contingent upon the number of cases of labor disputes s i nce i t...

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