Exporting and the Wage Premium in Foreign Firms in Africa: Differential Effects across

Export Destinations

Verena Tandrayen, Shyam Nath and Chris Milner

Presentation Outline

Introduction

Objectives Literature Review Data Methodology Findings Conclusion

Introduction

FDI and Trade – engines of growth – SSA

FDI and Trade – welfare implications

FDI TRADE

WAGES

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?

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)

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.

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

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

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

Methodology

Mincerian basic wage determination model (Mincer, 1974)..

Our wage equation:

where i = 1,……. I workers, wijt

is the monthly wage of individual i in firm j at time t.

ijtjt11jt1 0jt9jt8jt7

jt6ijt5ijt4ijt3ijt2ijt10ijt

T im eS ec to rS ta teC a p cityS izeD o m E xpexpF o rN

F o rE xpO ccuE d u cT en u reA g eM a lew lo g

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

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

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.

Foreign 0.393 (2.88)***

ln(capital) 0.141 (3.62)***

ln(employ ment) 0.447 (6.60)***

State -0.003 (0.01)

Capcity 0.265 (2.21)**

Dependent variable =1 if exporter, 0 otherwise Logit regression

Findings: Questions 1 and 2 Do foreign exporting firms pay more than foreign non exporting and domestic exporting firms?

ForExp 0.150 0.111 0.308 0.476 0.395 0.180 0.253

(3.23)*** (2.36)** (8.32)*** (2.31)** (3.41)*** (4.23)*** (12.14)***

ForNExp 0.091 0.250 -0.047 -0.064 0.291 0.078 0.202

(2.36)** (8.57)*** (1.38) (0.69) (6.11)*** (1.57) (11.33)***

Cameroon Ghana Kenya Tanzania† Zambia Zimbabwe Pooling

Do mExp 0.106 0.298 0.058 0.163 0.188 0.018 0.108

(2.41)** (7.27)*** (2.03)** (1.73)* (2.82)*** (0.62) (6.17)***

Table 2OLS estimation

Findings: Questions 1 and 2Do foreign exporting firms pay more than foreign non-exporting and domestic exporting firms?

Cameroon Ghana Kenya Tanzania† Zambia Zimbabwe Pooling

ForExp 0.127 0.037 0.367 0.511 0.337 0.197 0.285

(2.11)** (0.52) (7.61)*** (1.89)* (2.67)*** (3.94)*** (10.76)***

ForNexp 0.134 0.274 -0.073 -0.183 0.265 0.090 0.227

(2.56)** (7.34)** (1.53) (1.64) (4.90)*** (1.57) (9.89)***

Do mExp 0.108 0.313 0.088 0.149 0.287 0.025 0.131

Table 3IV estimation

Findings: Questions 1 and 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%.

Findings: Questions 1 and 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

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

ForExpSkill 0.326 0.129 0.513 0.526 0.639 0.202 0.350

(5.29)*** (2.15)** (5.93)*** (2.00)** (3.79)*** (2.69)*** (9.94)***

ForExpUSkill 0.159 0.096 0.379 0.362 0.477 0.336 0.245

(1.59) (1.48) (3.62)*** (2.45)** (1.90)* (2.75)*** (5.66)***

ForNexpSkill 0.140 0.248 -0.148 0.107 0.386 0.069 0.247

(2.41)** (5.22)*** (1.61) (0.81) (5.92)*** (0.81) (7.96)***

ForNexpUSkill 0.161 0.252 -0.006 -0.245 0.395 0.318 0.375

(2.02)** (7.14)*** (0.06) (2.24)** (3.11)*** (1.45) (12.05)***

Do mExpSkill 0.137 0.398 0.150 0.248 0.106 -0.111 0.165

(2.26)** (5.59)*** (2.30)** (2.02)** (1.12) (1.72)* (4.98)***

Cameroon Ghana Kenya Tanzania† Zambia Zimbabwe Pooling OLS

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.

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

ForExp in-Africa 0.137 0.250 2.079 0.305 0.394 0.214

(2.30)** (3.11)*** (3.75)*** (1.73)* (2.74)*** (4.91)***

ForExp out-Africa 0.143 -0.031 - - -0.254 0.075

(1.73)* (0.35) - - (2.15)** (1.45)

Do mExp in-Africa 0.143 0.022 1.799 0.220 0.279 0.091

(2.03)** (0.30) (3.41)*** (1.78)* (2.58)** (2.33)**

Do mExp out-Africa 0.140 -0.184 -0.080 -0.339 -0.034 -0.090

(1.46) (2.64)*** (0.52) (2.04)** (0.29) (2.01)**

ForNExp 0.059 -0.350 - 0.174 - 0.086

(1.51) (1.09) - (1.55) - (2.32)**

Cameroon Kenya Tanzania Zambia Zimbabwe Pooling

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

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

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

Thank You