Verena Tandrayen, Shyam Nath and Chris Milner

1. Verena Tandrayen, Shyam Nath and Chris Milner Exporting and the Wage Premium in Foreign Firms in Africa: Differential Effects across Export Destinations

2. Presentation Outline • Introduction • Objectives • Literature Review • Data • Methodology • Findings • Conclusion

3. Introduction • FDI and Trade – engines of growth – SSA • FDI and Trade – welfare implications FDI TRADE WAGES

4. Objectives • Do foreign exporting firms pay more than domestic exporting firms? • Do foreign exporting firms pay more than foreign non-exporting firms? • Is the wage premium more for skilled workers? • Is the wage premium robust across all export markets?

5. Literature Review Foreign firms pay more because • They possess firm specific assets (Hymer, 1976), OLI advantages (Dunning, 1992; Caves, 1996)... • They are more productive, more capital intensive, have the latest technology, invest more in on the job training (Gorg et al, 2002)‏

6. We argue that foreign firms pay more as they export more..... • Export market knowledge advantages (informational, branding and marketing capacity) for foreign firms • This will increase the probability of foreign firms to export relative to domestic firms. • Exporting will affect firm performance and behaviour (e.g. a productivity-enhancing or wage-disciplining effect)‏ • We anticipate that exporting will account in part for the foreign firm wage effect.

7. Existing Studies Exports and Wages • Wages are higher in exporting firms and the wage premium is higher for skilled workers • Bernard & Jensen (1995)- USA, Girma et al. (2002) - UK.. • Milner and Tandrayen (2007) – sample of African countries • A positive link between wages and export status • A larger skilled wage premium • Exporting within Africa – wage premium • Exporting outside Africa – wage discount • African markets – less competitive and more protected

8. Existing Studies Foreign Ownership and Wages • Foreign firms pay more than domestic firms • Gorg et al. (2002) for Ghana, Te Velde and Morrissey (2001) for Ghana, Kenya, Zambia, Zimbabwe and Cameroon • Specific assets, on the job training arguments • But the export argument is not used to explain the foreign wage premium

9. Data • World Bank’s Africa Regional Programme on Enterprise Development (RPED) • Employer-employee matched data set • 6 SSA countries: Cameroon, Ghana, Kenya, Tanzania, Zambia and Zimbabwe. • 3 waves: 1993 to 1995, 10 workers interviewed per firm • Over 200 enterprises across 4 main industries : Food, Metal, Textiles,Wood and Furniture • Covers 80% of the manufacturing sector

10. Methodology • Mincerian basic wage determination model (Mincer, 1974).. • Our wage equation: where i = 1,……. I workers, wijtis the monthly wage of individual i in firm j at time t.

11. Methodology • Human capital characteristics - gender, age, job tenure, occupation and education. • Sector covers industry dummies • Time contains year dummies • Size - firm size • State - firm is state-owned or not • Capcity - location of firm - the firm is located in the capital city or not • ForExp(NExp) - interacting foreign ownership and exporting (non-exporting) • DomExp - interacting domestic ownership and exporter status

12. Methodology • Preliminary checks to detect the presence of major outliers and to test for heteroscedasticity. • We use OLS with robust standard errors • Test the potential endogenous nature of the foreign exporter, foreign non-exporter and the domestic exporter • IV methodology is used with robust standard errors • Instruments: lagged values of the different types of firms, the capital-labour ratio and the ratio of value-added to capital

13. The Foreign Ownership – Export Link • Foreign firms pay more because they are more likely to engage in foreign trade than domestic firms. • To confirm their relatively higher export potential, a simple logit estimation is carried out by pooling all countries.

14. Findings: Questions 1 and 2Do foreign exporting firms pay more than foreign non exporting and domestic exporting firms? Table 2 OLS estimation

15. Findings: Questions 1and 2Do foreign exporting firms pay more than foreign non-exporting and domestic exporting firms? Table 3 IV estimation

16. Findings: Questions 1and 2Do foreign exporting firms pay more than foreign non-exporting and domestic exporting firms? • The wage premium of foreign exporting firms - 11.1% for Ghana, 15% for Cameroon, 18% for Zimbabwe, 30.8% for Kenya, 39.5% for Zambia and 47.6% for Tanzania • The coefficient of ForNexp is positive for 4 countries, with significance in three of these; having negative, but insignificant signs in the case of Kenya and Tanzania. • Significant premium for domestic exporters over domestic non-exporting firms - ranges from 5.8% to 29.8%.

17. Findings: Questions 1and 2Do foreign exporting firms pay more than foreign non-exporting and domestic exporting firms? Pooled results • The pooled results show that overall foreign exporting firms pay more than all other types of firms. • The magnitude of the coefficient of foreign exporters is greater than foreign non-exporters and domestic exporters. • This is explained by the higher productivity and performance of foreign exporting firms....more technology, firm specific assets... in line with theory

18. Findings: Question 3Is the wage premium in foreign exporting firms more pronounced for skilled workers? Table 4-OLS

19. Findings: Question 3Is the wage premium in foreign exporting firms more pronounced for skilled workers? • Skilled workers in foreign exporting firms earn higher earnings than their counterparts in all types of firms. • The skilled mark-up ranges from 12.9% for Ghana to 63.9% for Zambia • Foreign exporters have higher capital intensity which needs greater skill intensity. Higher demand for skilled labour and skilled wage premium • In foreign non-exporting firms both skilled and non-skilled workers are paid more than domestic non-exporting firms.

20. Findings: Question 4Is the wage premium robust across all export markets?

21. Findings: Question 4Is the wage premium robust across all export markets? • We observe a positive wage premium for foreign firms exporting within the African continent • Pooled Result: 21.4% higher • Individual Economies: Ranges from 13.7% for Cameroon to 39.4% for Zimbabwe • Firms exporting to non-African economies, we find a wage discount • This result applies for both domestic and foreign firms

22. Findings: Question 4Is the wage premium robust across all export markets? • African market is more protected by natural trade barriers and is less competitive • A less competitive environment does not discipline wage setting behaviour. • Non-African markets are more competitive and less protected

23. Conclusion • Foreign exporting firms pay a higher wage mark-up than foreign non-exporters and domestic exporters. • This is consistent with the specific assets hypothesis of foreign firms and their ability to cover the sunk costs of entering the export market (Roberts and Tybout, 1997)‏ • Once we account for export destinations, we find a wage discount for foreign firms exporting to non-African economies and wage premium only for foreign firms exporting within the African continent

24. Thank You