Foreign companies increase GDP by 0.9 percent, and their workers earn higher wages, the Chief Economist published.
The presence of foreign companies in Israel increases GDP by 0.9%, and their contribution to the productivity of employees – even if they later go on to work in local companies – is likely to reach 10%, says a new study published by the Ministry of Finance's Chief Economist.
The importance of this study arises from the difference between the ideal and reality in the debate about the contribution of multinationals to the Israeli economy. On the one hand, Israel - like many other countries - offers benefits for investment by multinational companies in the form of capital and employment grants and major tax benefits. These benefits are offered based on the understanding that these companies significantly impact the Israeli economy: they are usually at the forefront of technological and managerial knowledge, which is expected to trickle down to the economy and increase overall productivity rates. However, there’s a lack of empirical studies that estimate the actual scope of these effects.
This research presents supporting quantitative data about these effects, while using a methodology that helps to overcome the existing difficulties in studies of this type, such as the bias created by the fact that multinational companies tend to employ the best employees in a given market.
The study was conducted based on a database of unique administrative data, including employment history and the firms' characteristics, among 450 of the leading companies in Israel, in the years 2005-2010. It examined the effect of multinational employment on wages (assuming wage growth generally reflects an increase in productivity), and focused on two channels of impact:
1. The increase in the quality of human capital: workers gain experience when working in a globally leading company, learn about advanced production technology, work procedures, and management tools;
2. The creation of jobs with higher productivity.
The results indicate that the experience workers gain while working in multinational companies does increase productivity: a worker with 2 years of experience in a multinational company earns higher wages on average, at a rate of about 10% in a leading multinational (compared to 1.3% in an average multinational company) – which doesn’t change even when the worker goes on to work in a local company (!). Furthermore, employees in a leading multinational earn approximately 14% higher wages on average, compared to employees in a local company with similar characteristics. It should be noted that in an average multinational the effects are more modest, but they too are positive and significant.
The Foreign Investment and Industrial Cooperation Authority finds studies of this kind highly beneficial, as they help to bridge the research gap in this field and provide empirical support for the importance of foreign investment in Israel. There are other assumed effects by multinational companies that weren’t considered in this study, (e.g. impact on local sub-suppliers), and the Authority is looking forward to seeing more studies taking advantage of the the large research potential in this field.