Many countries have recently experienced rising within-industry market concentration, which raised market power among few firms. Evidence suggests that increasing market concentration in national markets has likely also raised concentration in global markets, in which multinational enterprises (MNEs) deploy their productive assets such to organize production and distribution in global value chains. What are the implications of increasing market concentration of multinationals for domestic firms and workers?
This paper explores the effect of foreign entry, and its accompanying product and labour market power, on wage premium at foreign firms, and labour earnings and employment at domestic firms. To this end, we combine administrative data on the universe of formal firms and workers in South Africa, offer a novel strategy to estimate jointly price markups and wage markdowns, and deploy event studies to obtain causal estimates on the effect of foreign entry.
While many governments in lower-income economies go through great lengths to attract and maintain MNEs, the evidence base is limited. A large literature shows positive repercussions from MNEs on domestic firms and workers, although it is less clear if market power of MNEs may lessen or eliminate these gains. This project aims to inform policy-makers how MNE market power may affect gains from multinationals and whether additional policies are necessary to absorb negative side effects (e.g. competition policy). While South Africa is not a low-income economy, it is characterized by many features found in low-income settings, e.g. high inequality. Within the project we work with the South African Treasury to translate research into policy advice.
