Why Do Multinationals in Poor Countries Pay High Wages?

This paper looks at the strategic behavior of multinational corporations (MNCs) in less developed countries. We start with the premise that MNCs have superior technologies, and that domestic firms lack informational access to this superior technology. Workers trained on the MNC technology can transmit the information to competing or start-up domestic firms. We derive conditions under which multinationals strategically offer their workers higher wages than domestic firms to prevent domestic firms form poaching their workforce and learning their trade secrets. With quantity competition in the domestic market, MNC's offer higher wages if and only if their technology advantage is sufficiently great and the output goods are sufficiently close substitutes. With price competition, the MNC always offers the wage premium. We also derive conditions under which multinationals inefficiently divide job tasks between workers in order to raise the number of trained workers that the domestic form must acquire to learn the MNC's trade secrets