International Rent Sharing and Domestic Labour Markets: A Macroeconomic Analysis

Foreign subsidiaries account for a significant part of output in many industrialised countries. Compared to international trade relations, however, relatively little is known about the role foreign direct investment linkages play 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 for six countries whether a cross-border rent-sharing phenomenon can be identified at the macroeconomic level. The rent-sharing hypothesis implies that an increase in foreign profitability should boost wages and/or employment in the domestic economy. We find corroborative evidence for Belgium, France, Germany, the Netherlands and the UK. US labour market conditions, by contrast, are not affected by changes in profitability in other countries, which could be explained by the still relatively modest role of foreign-owned capital in the American economy. Hence, international rent sharing might be an important aspect of global economic linkages.