Multinational Enterprises, Foreign Knowledge Spillovers and Host Country Wages

In this paper we study how the expansion of multinational enterprises in the host country affects its wages using a general equilibrium factor specific framework for a small open economy with a flexible labor market. We identify three potential effects of MNE activity associated with the transfer of foreign knowledge, diffusion of this knowledge among indigenous firms and the inflow of capital from abroad. We show that the impact of multinational enterprises on wages in the host country depends on differences in capital intensity between multina-tional and local sectors, the amount of capital transferred to the host country from abroad and the magnitude of knowledge spillovers stemming from multinational activity to indigenous firms.