This Paper analyses the demand for labour by home multinational enterprises
(MNEs) in Europe. To this end we use a unique firm-level panel data set of
more than 1,200 European multinational enterprises and their subsidiaries that
are located in either the European Union, Central and Eastern Europe or both.
We investigate whether employment in the MNEs’ subsidiaries is a substitute
for home employment – in other words we investigate whether European
MNEs can easily relocate employment between the parent companies and
Our main findings can be summarized as follows: (i) We find evidence for
substitution effects between parent and foreign employment. A decline of 10%
in MNE affiliate’s wage costs is associated with a decline in parent
employment of between 1.5% and 2% on average. (ii) This effect is mainly
driven by firms that operate in the manufacturing sector. Moreover, the
substitution effects mainly take place between EU parents and their affiliates
located within the EU, rather than affiliates located in Central and Eastern
Europe. (iii) We also report results for non-manufacturing firms – we find no
substitution effects between parents and subsidiaries in the service sectors,
while we do find positive substitution effects between parents and their
affiliates in Central and Eastern Europe for firms operating in the wholesale
trade and construction sectors.
Our results suggest that on average the competition from low wage countries
in Central and Eastern Europe does not contribute to a relocation of domestic
jobs to Central and Eastern Europe. When substitution effects do take place,
however, they mainly occur between parent firms and their affiliates that are
located in the European Union.