Multinational Firms, Technology Transfer, and Welfare

We construct an oligopoly model in which a multinational firm has a superior technology compared to local firms in the host country. Workers employed by the multinational acquire knowledge of its superior technology and can spread their knowledge to host firms by switching employers. The multinational chooses to pay a wage premium to prevent host firms from hiring away its workers if host firms are sufficiently disadvantaged and/or there are sufficiently many host firms. Diffusion of the superior technology benefits host firms at the expense of workers, whose wages suffer. The host government can have an incentive to attract FDI, even when technology transfer will not result, due to the wage premium earned by employees of the multinational firm. Also, FDI with technology transfer may reduce host welfare