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Do Foreign Firms Really Pay Higher Wages? Evidence from Different Estimators

Pedro S Martins

CSGR Working Paper No. 149/04

October 2004


We contribute to the literature on Foreign Direct Investment and labour markets by examining

wage differentials between domestic and foreign firms, drawing on a large Portuguese matched

employer-employee panel. Using OLS, the foreign-firm premium is large and significantly

positive but falls substantially when firm and worker controls are added. Moreover, the premium

also does not vary monotonically with foreign control, increases along the wage distribution and

is generally insignificant when using propensity score matching (PSM). Finally, using

differences-in-differences (DID), we find lower wage growth for workers in domestic firms that

are acquired by foreign investors, a result that holds when combining DID and PSM. Overall,

our evidence suggests that the commonly-documented OLS premium cannot be interpreted as a

causal impact.


JEL codes: C23, F23, J31.


Keywords: FDI, Wages, Matched Employer-Employee Data, Propensity Score Matching,