The effect of the quality of governance on multinational
wages and the moderating role of trade unions
Author: Reinout Bom
Student number: 10854134
Faculty of Economics and Business Thesis supervisor: Dr Ilir Haxhi
MSc Business Administration Second reader: Dr Niccolò Pisani
STATEMENT OF ORIGINALITY
This document is written by Reinout Bom who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
The WageIndicator data used in this thesis have been made available by the WageIndicator Foundation, and have been used with their permission. The Foundation bears no responsibility for the analyses or interpretation of the data reported here.
TABLE OF CONTENTS
1. INTRODUCTION ... 1
2. LITERATURE REVIEW ... 7
2.1 Institutions and MNE labour practices ... 7
2.2 The quality of governance ... 9
2.3 Trade unions ... 11
2.4 Euro-zone ... 12
3. THEORETICAL FRAMEWORK ... 14
3.1 Political stability, regulatory quality and MNE wages ... 14
3.2 Trade unions ... 16
3.3 Euro-zone ... 18
4. METHODS ... 20
4.1 Sample and data collection ... 20
4.2 Measures ... 21 4.2.1 Dependent variable ... 21 4.2.2 Independent variable ... 21 4.2.3 Moderating variables ... 23 4.2.4 Control variables ... 24 4.3 Model specification ... 24 5. RESULTS ... 26 6. DISCUSSION ... 33 6.1 Academic relevance ... 34 6.2 Practical contribution ... 36
6.3 Limitations and suggestions for future research... 37
7. CONCLUSION ... 39
ACKNOWLEDGEMENT ... 42
REFERENCES ... 43
LIST OF FIGURES AND TABLES Figure 1. Conceptual model ... 19
Table 1. Regression expectations ... 25
Table 2. Descriptive statistics: means, standard deviations and correlations ... 26
Table 3. Variance inflation factor tests for multicollinearity ... 27
Table 4. Results regression analysis (dependent variable: WAGEHRPP) ... 31
ABSTRACT
This thesis researches three questions regarding the relationship between the quality of governance and multinational enterprise (MNE) wages. The first research question analyses the direct effect of the quality of governance on multinational wages. In this relationship, the specific aspect of MNE wages is unexplored in the literature. Prior studies show that good governance leads to better economic development. In line with these previous studies, this study indicates that good governance leads to higher multinational wages. More specific, higher levels of political stability and regulatory quality are positively associated with higher MNE wages. The second research question explores the moderating role of trade unions on the relationship between the quality of governance and multinational wages. Trade unions have a moderating effect on the relationship between regulatory quality and MNE wages. Surprisingly, this effect is negative which results in lower MNE wages. This suggests that trade unions mitigate the ability of governments to formulate and implement sound policies and regulations that permit and promote private sector development. The findings regarding the third research question show that countries within the Euro-zone have similar regulatory qualities as opposed to countries outside the Euro-zone. The findings of the present research contributes to the existing research by showing that good governance leads to higher MNE wages. The findings also have important managerial and policy implications. First, when companies look for locations to set up subsidiaries they should look at the political stability and regulatory quality of the country. Second, trade unions should re-evaluate their bargaining strategies because the current negotiation style has a negative effect on MNE wages. Finally, it is for countries outside the Euro-zone interesting to improve the regulatory quality of the country to attract higher paid employees.
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1. INTRODUCTION
The economic development of countries is largely based on the quality of governance (Kaufmann, Kraay, & Zoido-Lobatón, 1999). This means that improving the quality of governance will improve per capita incomes significantly (Kaufmann & Kraay, 2002). The concept of the quality governance is operationalized by measuring subjective perceptions regarding the quality of governance in different countries. These perceptions are aggregated into six quality indicators corresponding to six fundamental governance concepts. The six indicators are (1) voice and accountability; (2) political stability and absence of violence/terrorism; (3) government effectiveness; (4) regulatory quality; (5) rule of law; and (6) control of corruption.
Multinational enterprises (MNEs) operate globally and across different institutional environments. North (1991) defines institutions as informal constraints and formal rules devised by humans to structure political, economic and social interaction. Prior research has focused on how institutions and institutional distance affect MNE entry modes (Dikova & Van Witteloostuijn, 2007), legitimacy (Kostova & Zaheer, 1999), location choice (Bevan, Estrin, & Meyer, 2004), ownership (Zhang, Zhong, Wen, & Jiang, 2014) and performance (K. D. Brouthers, 2002; Chacar, Newburry, & Vissa, 2010). However, few studies address the relationship between institutions and MNE labour practices (Meyer, 2004). Labour practices consist of wages and labour standards with respect to health, safety, working hours, sick leave, child labour and unionization (Meyer, 2004; O'Rourke, 2003). This study focuses solely on wages as one aspect of the labour practices.
There is a wealth of cross-country data regarding the various quality aspects of governance and its effect on economic development (Kaufmann et al., 1999). However, this data says little about how specific aspects of the quality of governance affect development in a
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particular setting. There is a potential in understanding the linkages between the quality of governance and its impact on MNEs. This information has the possibility to identify policy priorities on how to improve governance and empowers corporate leaders to support governance improvements. This study will address specific aspects of the quality of governance and how it will affect MNEs wages.
There is a growing empirical literature documenting the relationship between various aspects of the quality of governance and economic outcomes (Kaufmann et al., 1999). This literature includes Mauro (1995) on the effects of corruption on economic growth and investment; Loayza (1996) on the determinants of the unofficial economy; Audes and Tella (1996) on the causes and consequences of corruption; Knack and Keefer (1997) on the importance of institutions for economic growth; Tanzi and Davoodi (1998) on corruption and public investment, and Wei (1997) on the effects of corruption on FDI. However, until now no research has focused on MNE wages as an indicator for economic development.
The results of the studies that address the quality of governance across countries show that good governance lead to better economic development (Kaufmann et al., 1999; Kaufmann & Kraay, 2002). The study by Kaufmann and Kraay (2002) measures the quality of governance by using rule of law as one of the six quality indicators. They use only this dimension because it is highly correlated with both corruption and government effectiveness. Furthermore, this previous study measures economic development as per capita incomes. Until now there is no study that uses political stability and regulatory quality as predictor concepts for the quality of governance in combination with MNE wages as dependant variable.
To fill this gap in the literature this thesis studies the direct effect between the quality of governance and multinational wages. MNE wages is defined as the hourly wage (gross) of employees working for a MNE. Usage of MNE wages in this relationship is different from prior
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studies (Kaufmann et al., 1999; Kaufmann & Kraay, 2002). However, it is expected that MNE wages and per capita income are strongly correlated. Therefore, this study predicts that certain aspects of the quality of governance will affect MNE wages because multinationals conduct business all around the world where there are divergent quality levels of governance. This results in the first research question:
Research question 1: How does the quality of governance affect multinational wages?
The purpose of this study is to shed more light on the relationship between the quality of governance and MNE wages. Kaufmann and Kraay (2002) use the rule of law as a predictor for the quality of governance and measure economic development as per capita incomes. This thesis contributes to the existing literature by using political stability and regulatory quality as indicators for the quality of governance in the specific context of MNE wages. It is expected that an improvement of each of the two indicators lead to higher MNE wages.
This thesis also explores the moderating role of trade unions on the relationship between the quality of governance and multinational wages. MNEs are under constant pressure from stakeholders to operate in their interest (Freeman, 1984). These stakeholders include shareholders, trade unions, employees, customers, governments and society. All of these have divergent interests and are different across countries. The government is a stakeholder which has an important influence on how MNEs conduct business (Scott, 2008). Moreover, governments and their regulations are different across countries which makes it difficult for MNEs to operate with a truly global strategy. This means that MNEs have to comply with regulations which could affect the height of employee’ wages.
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Furthermore, trade unions are also stakeholders for MNEs because they represent employee interests such as higher pay and benefits, health care, safety standards and working conditions (Waddock, 2008). Membership of trade unions by employees give these organizations bargaining power to enforce higher wages and labour standards. There is extensive research on the strength of trade unions and productivity (Vernon & Rogers, 2013), on unions and employer association (Wallerstein, Golden, & Lange, 1997), on union density (Vernon, 2006), and on union bargaining power (Visser, 2013). However, no previous study has investigated the possible moderating role of trade unions on the relationship between the quality of governance and MNE wages. Hence, the second research question:
Research question 2: How is the relationship between the quality of governance and multinational wages moderated by the bargaining power of trade unions?
To further investigate the direct effect between the quality of governance and MNE wages, this thesis makes a distinction between Euro-zone member and non-member countries. All countries that are included in this study are member of the Organisation for Economic Co-operation and Development (OECD). These countries are regarded as the most developed countries in the world. However, not all OECD member countries are also part of the Euro-zone. It is expected that certain aspects of the quality of governance will influence MNE wages, but that this result is divergent across Euro-zone member and non-member countries. This is because the monetary policy for Euro-zone member countries is set by the European Central Bank (ECB). Therefore, this thesis also studies the relationship between the quality of governance and MNE wages within and outside the Euro-zone. Therefore, the third research question:
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Research question 3: How is the relationship between the quality of governance and multinational wages moderated by being member of the Euro-zone?
This study uses a cross-sectional research design to examine the effect of the quality of governance on MNE wages including two moderators, which are trade unions and Euro-zone country membership. The sample is based on MNEs operating in 15 OECD countries in the year 2010. As primary data source, the WageIndicator database is used, supplemented with data from The World Bank and ICTWSS. The hypotheses test the direct effect between the quality of governance and MNE wages, including the two moderators. The hypotheses are tested using a multiple linear regression with MNE wages as dependant variable. The results partially support the hypotheses.
This thesis contributes to the existing literature by showing that good governance leads to higher MNE wages. Furthermore, trade unions have a negative moderating effect on the relationship between the quality of governance and MNE wages, which is surprising since this is contrary to an common view in the literature (Corneo, 1995; Freeman, 2009; Oswald, 1985). The findings also show that there is a significant difference between OECD member countries. The results show that within the Euro-zone countries have similar regulatory qualities because these were set by the ECB, whereas outside the Euro-zone countries have divergent regulatory qualities.
The findings of the present research also have managerial and policy implications. First, the results have managerial implications for MNES when they are looking for locations to set up subsidiaries. Second, it has implications for trade unions because they should re-evaluate their bargaining strategies. Finally, it has policy implications for Euro-zone non-member countries that are interested to improve the regulatory quality of the country.
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This thesis is structured as follows. First, the next section discusses the literature regarding institutions and the quality of governance, MNE labour practices and wages, trade unions, and the Euro-zone. Section 3 includes the theoretical framework with the development of the hypotheses. The method section discusses the data collection and measures. Section 5 discusses the statistical analyses and results. The discussion section mentions the academic and managerial implications, limitations, and suggestions for future research. Finally, section 7 contains the conclusion of this master thesis.
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2. LITERATURE REVIEW
2.1 Institutions and MNE labour practices
Multinational enterprises, defined as firms “that engage in foreign direct investment (FDI) and own or control value-adding activities in more than one country” (Dunning, 1991, p. 1), operate across different institutional environments. The institutional environment consists of informal constraints (sanctions, taboos, customs, traditions, and codes of conduct) and formal rules (constitutions, laws, property rights) devised by humans to structure political, economic and social interaction (North, 1990; North, 1991). These regulatory, normative and cultural cognitive institutions have an impact on MNE activities and behaviour (Scott, 2008).
Traditionally there are two perspectives on how MNEs operate in the international business. Porter (1980) introduced the industry-based view which argues that conditions in an industry determine firm strategy and performance. A resource-based view, argued by Barney (1991), focuses on firm specific differences to explain firm strategy and performance. These two views ignore the formal and informal institutions in which MNEs operate. Therefore, the institution-based view emerged as third perspective to include the environment as a determent for firm activities and behaviour (Peng, 2002; Peng, Wang, & Jiang, 2008; Peng, Sun, Pinkham, & Chen, 2009).
Aoki (2001) conceptualizes institutions from a game theoretic perspective in three different ways: (1) as ‘players of the game’, taking the form of organizations such as governments, courts, industrial organizations; (2) as ‘rules of the game’ (North, 1990), both guiding and constraining actions of the players; and (3) as ‘equilibrium to the game’ (Mudambi & Navarra, 2002). MNEs can be viewed as players of the game within the framework provided by institutions. Thus, MNEs are assessed by evaluating the institutional framework within they operate. However, it is possible that the same institutional environment can have different outcomes on MNE behaviour (Mudambi & Navarra, 2002).
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MNEs and their subsidiaries play an important role in international business. MNEs become powerful because they generate a large part of a country’s FDI (Dunning, 1991; Waddock, 2008). FDI is regarded by many governments as a mean to improve the domestic economy and national welfare (Meyer, 2004). Political instability and the sensibility of the country’s government to lobbying are great sources of uncertainty for FDI (Mudambi & Navarra, 2002). In line with these studies, Brouthers, Gao, and McNicol (2008) note that corruption has a significant impact on FDI levels. Developing countries have different laws regarding lobbying in comparison with developed countries. Payments by MNEs to the government could be acceptable in developing countries, whereas in developed countries it would be considered bribery.
MNEs experience pressures from multiple stakeholders to operate in a way that is in line with stakeholder’s interest. Freeman’s definition of stakeholder is “any group or individual that can affect or is effected by the achievement of the organization’s objectives” (1984, p. 46). This is a broad definition of the stakeholder theory and can include employees, customers suppliers, trade unions, communities and societies. Moreover, institutions such as governments can be regarded as a stakeholder of the firm. Internal and external stakeholders have an influence on MNEs behaviour, for example regarding labour practices. MNE labour practices consist of wages and labour standards with respect to health, safety, working hours, sick leave, child labour and unionization (Meyer, 2004; O'Rourke, 2003). Internal pressures from stakeholders such as shareholders could induce MNEs to lower wages and lower labour standards to reduce production costs. On the other hand, external pressures such as regulation, trade unions, global standardization and firm reputation induce firms to pay higher wages and improve labour standards (Meyer, 2004).
It is common for developing countries that governments fail to ensure the efficient functioning of financial- and labour markets (Meyer, 2004). Meyer defines emerging
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economies as “middle or low income economies with growth potential that makes them attractive for foreign investors” (p. 260). These economies have less sophisticated laws and regulations, as opposed to developed countries, and seem unable to enforce laws within their country. Across and within developed and developing countries there is a distinction between skilled and unskilled labour. As MNEs wish to retain skilled labour, higher wages and better contract characteristics are in order. In opposite, unskilled labour is easily replaceable which induces lower wages and lower labour standards (Bhagwati, Panagariya, & Srinivasan, 2004; Meyer, 2004). MNEs that have homogenous products and are in search for a competitive advantage will most likely resort to unskilled labour in developing countries to lower production costs. This is also known as a ‘race to the bottom:’ a downwards spiral of rivalry that lowers labour practices among developing countries (Spar & Yoffie, 1999).
2.2 The quality of governance
This study researches the institutional environment with a focus on the formal rules such as constitutions, laws and property rights. These formal rules are defined as the quality of governance. Kaufmann and Kraay (2002) conceptualize governance as follows: “the traditions and institutions by which authority in a country is exercised. This includes (a) the process by which governments are selected, monitored and replaced; (b) the capacity of the government to effectively formulate and implement sound policies; and (c) the respect of citizens and the state for the institutions that govern economic and social interactions among them” (p. 5). The concept of the quality of governance is operationalized by measuring subjective perceptions regarding the quality of governance in different countries (Kaufmann et al., 1999; Kaufmann et al., 2011). The authors construct six aggregate governance indicators corresponding to each of the three mentioned areas.
The six indicators of the quality of governance are (1) voice and accountability: “the extent to which a country's citizens are able to participate in selecting their government, as
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well as freedom of expression, freedom of association, and a free media” (Kaufmann et al., 1999, p. 7); (2) political stability and absence of violence/terrorism: “the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically‐motivated violence and terrorism” (Kaufmann et al., 1999, p. 7); (3) government effectiveness: “the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies” (Kaufmann et al., 1999, p. 8); (4) regulatory quality: “the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development” (Kaufmann et al., 1999, p. 8); (5) rule of law: “the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence” (Kaufmann et al., 1999, p. 8); and (6) control of corruption: “the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests” (Kaufmann et al., 1999, p. 8).
This study uses two of the six indicators, which are political stability and regulatory quality as concepts for the quality of governance. Political instability is a great source of uncertainty for MNEs (Mudambi & Navarra, 2002), and can lead to MNEs compromising their labour standards, which results in lower wages (Meyer, 2004; Spar & Yoffie, 1999). Regulatory quality focuses on the policies of the countries. It includes “measures of the incidence of market-unfriendly policies such as price controls or inadequate bank supervision, as well as perceptions of the burdens imposed by excessive regulation in areas such as foreign trade and business development” (Kaufmann et al., 1999, p. 8).
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2.3 Trade unions
Trade unions are organizations that care mainly about its members’ real wages and the level of employment in its industry (Oswald, 1985). A labour union is an organization of workers that represent employee interests such as higher pay and benefits, health care, safety standards and working conditions (Waddock, 2008). The terms trade unions and labour unions are used interchangeably. Trade unions have bargaining power, provided by their members, to influence the behaviour of the labour market (Corneo, 1995). This means that they can enforce higher wages and labour standards (Freeman, 2009). Trade unions vary greatly among developing countries but less than they vary among advanced countries. According to Freeman (2009), this is because collective bargaining is weaker in developing countries than in developed countries.
Jackson (2005) states that union density is seen as the dominant indicator to conceptualize and measure the strength of labour unions. This is an extensively used measure of union strength and collective bargaining power in firm- and industry-level studies (Vernon & Rogers, 2013). Union density as is defined as net union membership as a proportion of wage and salary earners in employment. Membership of a trade union establishes a primary power resource that is correlated with greater centralization of collective bargaining and political influence of labour (Vernon, 2006). Trade unions bargain with employers and governments on behalf of trade union members and negotiates labour contracts with employers. These organizations sometimes use strikes as a political mean to achieve employees’ goals. Thus, trade unions have to be strong in terms of memberships to have an influence on politics so that employees’ interests such as a higher pay is represented.
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2.4 Euro-zone
The OECD is an organization that promotes policies that will improve the economic and social well-being of people around the world. OECD member countries discuss topics regarding prosperity, poverty, economic growth, and economic- and social development. OECD countries can agree upon rules and formal agreements, for example regarding fighting bribery and the treatment of capital movements. Governments examine each other to ensure that all agreements are carried out. OECD member countries are regarded as developed countries and include the most advanced economies such as the United Kingdom, United States and some European countries (OECD, 2015).
Not all OECD member countries are part of the Euro-zone. In 1999, the Euro-zone included eleven countries of the European Union (EU). These countries entered a new monetary union with fixed Euro exchange rates. From that date onwards, monetary policy for these countries is set by the newly-formed ECB (Beyer, Doornik, & Hendry, 2001). The Euro-zone came into existence on 1 January 1999 (Fernandez-Villaverde, Garicano, & Santos, 2013). The euro project had four goals, namely “(1) to build a unified European identity; (2) to eliminate nominal exchange rate fluctuations and the imbalances that those could create; (3) to create a monetary authority isolated from political pressures; and (4) to broaden support for one structural, supply-side reforms to improve Europe’s growth rate” (Fernandez-Villaverde et al., 2013, p. 147). In 2010, sixteen countries were using the Euro as their official currency.
In sum, the specific relationship between the quality of governance and MNE wages is unexplored. Among the few contributions, Kaufmann and Kraay (2002) show that the quality of governance and per capita incomes are strongly positively correlated across countries. This means an improvement in governance leads to better economic development. However, the specific aspect of MNE wages has not been researched. Moreover, the moderating roles of
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trade unions and being member of the Euro-zone has received little attention in the literature. Therefore, this study aims to clarify the direct effect between the quality of governance and MNE wages, the moderating role of trade unions on the relationship between the quality of governance and MNE wages, and the Euro-zone as moderator on the relationship between the quality of governance and MNE wages.
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3. THEORETICAL FRAMEWORK
3.1 Political stability, regulatory quality and MNE wages
Many economists argue that malfunctioning government institutions constitute a severe obstacle to investment, entrepreneurship, economic development and innovation (Mauro, 1995). North (1990) emphasizes the importance of the formal institutional environment of a country as a crucial determinant to enforce rules and laws to structure political, economic and social interaction. These formal constraints are defined as the quality of governance. Kaufmann et al. (2011) conceptualize the quality of governance as “the traditions and institutions by which authority in a country is exercised” (p. 5). These formal constrains influence MNEs activities and behaviour (Scott, 2008). The concept of governance is operationalized by using six indicators regarding perceptions on the quality of governance in different countries (Kaufmann et al., 1999; Kaufmann & Kraay, 2002). The six indicators are (1) voice and accountability; (2) political stability and absence of violence/terrorism; (3) government effectiveness; (4) regulatory quality; (5) rule of law; and (6) control of corruption.
Previous studies examine the various aspects of the quality of governance on economic growth, investments, economic development, public investment and FDI (Ades & Tella, 1996; Kaufmann et al., 1999; Kaufmann & Kraay, 2002; Knack & Keefer, 1997; Loayza, 1996; Mauro, 1995; Wei, 1997). The findings suggest that that good governance leads to better economic development. More specific, Kaufmann and Kraay (2002) suggest that the quality of governance and per capita incomes are strongly positively correlated across countries (Kaufmann & Kraay, 2002). The results show that the quality of governance influence economic output. To expand the existing literature this study researches the influence of the quality of governance on MNE behaviour, i.e. multinational wages.
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The governance quality indicators all measure the same concept and are therefore highly correlated. To avoid the problem of multicollinearity, political stability and regulatory quality are used in this thesis as concepts for the quality of governance. Political stability and the absence of violence/terrorism is defined as “the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically‐ motivated violence and terrorism” (Kaufmann et al., 1999, p. 7). This indicator has an effect on the continuity of polices and on the ability of citizens to replace those in power. Regulatory quality is defined as “the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development” (Kaufmann et al., 1999, p. 8). Since it is expected that per capita incomes and MNE wages are highly correlated, it is interesting to look if political stability and regulatory quality also have an effect on MNE wages. An improvement of each of these two indicators is expected to have a positive effect on MNE wages.
Kaufmann and Kraay (2002) measure the quality of governance by using only the indicator rule of law as a predictor concept. They focus on this particular dimension because it corresponds most closely to the concept of protection of property rights, which has been widely used in the literature. Furthermore, this indicator is highly correlated with both corruption and governments effectiveness, therefore this one dimension of governance is used as representative of the broader areas in which the quality of governance appears. Their study shows a strong causal effect running from the quality of governance to per capita incomes. To expand this study we use two indicators in combination with MNE wages. Hence:
Hypothesis 1a: Political stability is positively related to MNE wages.
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3.2 Trade unions
As discussed earlier, trade unions are organizations of employees that represent employee interests such as higher wages (Oswald, 1985; Waddock, 2008). Previous literature shows that trade unions have bargaining power, provided by their members, to influence the behaviour of the labour market and to enforce higher wages (Corneo, 1995). Thus, trade unions have to be strong in terms of memberships to have an influence on politics so that employees interests such as a higher pay is represented. Trade unions bargain with employers and governments to negotiate labour contracts and use strikes as a political mean to achieve higher wages. It is expected that strikes have a negative effect on firm performance and on economic development, therefore it is likely that employers and governments give in to the trade unions demands to avoid strikes. This research predicts that membership of a trade union has a positive effect on the relationship between political stability, regulatory quality and MNE wages.
International financial institutions and economist believed that policy prescriptions such as reduced regulations, lower social protection, cuts in public sector pay, weaker unions and greater reliance on market wage setting compared to collective bargaining, was the way to create economic growth in developing economies (Freeman, 2009). Government or labour union setting of pay and work conditions that benefit modern sector worker were considered an obstacle for economic growth because this reduced the flow of workers from low productivity informal and rural sectors to the modern sector (Lipton, 1997). According to the World Bank’s 1990 Development Report: “Labour market policies – minimum wages, job security regulations, and social security - are usually intended to raise welfare or reduce exploitation. But they actually work to raise the cost of labour in the formal sector and reduce labour demand and increase the supply of labour to the rural and urban informal sectors, and thus depress labour incomes where most of the poor are found” (World Bank, 1990, p. 63). As
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a result, higher wages induced rural workers to migrate to urban areas, where they became unemployed while waiting for good jobs (Freeman, 2009).
Freeman (2009) reviewed the World Bank’s 1990 Development Report and found that regulations and trade unions are not an obstacle for economic development. Freeman found that trade unions vary greatly among developing countries but less than they vary among advanced countries and that trade unions and collective bargaining are less important in developing than in advanced countries, while government regulations are nominally as important. The author also found that trade unions are associated with higher wages. This research has led to a revised statement of the 1995 World Development Review: “Free trade unions are the cornerstone of any effective system of industrial relations. Unions act as agents for labour, monitor employers’ compliance with government regulations, can help raise workplace productivity and reduce workplace discrimination, and contributes to political and social development” (World Bank, 1995, p. 79). Freeman (2009) also gives a Chinese example that shows that trade unions can be critical when countries experience a great change as in China’s growth spurt. The study supports that cooperative labour relations (membership of trade unions) tend to produce better economic outcomes in developing countries. In sum, research finds that trade unions are associated with higher wages (Freeman, 2009). Therefore, the following hypotheses:
Hypothesis 2a: Ceteris paribus. trade unions positively moderates the relationship between political stability and MNE wages.
Hypothesis 2b: Ceteris paribus. trade unions positively moderates the relationship between regulatory quality and MNE wages.
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3.3 Euro-zone
All countries included in this study are OECD member countries. OECD member countries are regarded as developed countries and include the most advanced economies. Not all of the OECD member countries are member of the Euro-zone. Euro-zone member countries use the Euro as their official currency. According to the web page of the EU, a single currency offer many advantages: “such as eliminating fluctuating exchange rates and exchange costs. Because it is easier for companies to conduct cross-border trade and the economy is more stable, the economy grows and consumers have more choice. A common currency also encourages people to travel and shop in other countries. At global level, the euro gives the EU more clout, as it is the second most important international currency after the US dollar. The independent ECB is in charge of monetary issues in the EU. Its main goal is to maintain price stability. The ECB also sets a number of key interest rates for the euro area. Although taxes are still levied by EU countries and each country decides upon its own budget, national governments have devised common rules on public finances to be able to coordinate their activities for stability, growth and employment” (EU, 2015).
As mentioned in hypothesis 1, it is expected that the quality of governance of all OECD member countries is positively related to MNE wages. However, Euro-zone member countries operate under the same regulations and laws as opposed to countries outside the Euro-zone. Hence, it is expected that being a member of the Euro-zone as opposed not being a member of the Euro-zone, positively moderates the relationship between the quality of governance (political stability and regulatory quality) and MNE wages.
Fernandez-Villaverde et al. (2013) show that the arrival of the euro has led to a financial boom in the periphery of Europe due to the drop in interest rates and exchange rate risk. It was expected that the arrival of the euro would lead to economic reform: “when national governments lacked monetary autonomy and had only limited fiscal autonomy, they
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would face greater pressure to adopt structural reforms that they previously had refused to implement. However, the budget constraints for countries in the periphery of Europe were loosened, rather than tightened. Moreover, both public and private accountability was diminished during the financial boom because the consequences of bad decisions are largely imperceptible” (p. 164).
Hypothesis 3a: Ceteris paribus, being a member of the Euro-zone as opposed not being a member of the Euro-zone, positively moderates the relationship between political stability and MNE wages.
Hypothesis 3b: Ceteris paribus. being a member of the Euro-zone as opposed not being a member of the Euro-zone, positively moderates the relationship between regulatory quality and MNE wages.
The previously discussed hypotheses are summarized in the conceptual model as shown in figure 1.
Figure 1. Conceptual model
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4.1 Sample and data collection
This study uses a cross-sectional research design to examine the effect of the quality of governance on MNE wages including two moderators, which are trade unions and Euro-zone member countries. The sample is based on MNEs operating in 15 OECD countries in the year 2010. There are eight countries that are part of the Euro-zone and seven countries that are not. The countries that are members of the Euro-zone are Belgium; Finland; France; Germany; Italy; Netherlands; Slovak Republic and Spain. The countries that are not a member of the Euro-zone are Czech Republic; Denmark; Hungary; Poland; Sweden; United Kingdom and United States. As primary data source, the WageIndicator database (Tijdens & Osse, 2010) is used, supplemented with data from The World Bank and the database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts (ICTWSS). The WageIndicator database entails detailed information about earnings, benefits, working conditions, employment contracts and training, as well as data about education, occupation, industry, and household characteristics. The World Bank’s project regarding The Worldwide Governance Indicators reports aggregated individual governance indicators for 215 economies over the period 1996–2013, for the six dimensions of governance. The ICTWSS database has information on trade unions and wage settings for 34 countries between 1960 and 2012. This database is made available by the Amsterdam Institute for Advanced Labour Studies (AIAS), University of Amsterdam.
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4.2 Measures
4.2.1 Dependent variable
The dependent variable used in this thesis is MNE wages. To determine the hourly wage of employees working for a MNE the WAGEHRPP variable from the WageIndicator database is used, which is defined as wages per hour (gross), and is controlled for purchasing power parity (PPP). The calculation of the hourly wages is conducted by Tijdens and Osse (2010) in the following way: “The wages input is taken from the survey question about gross wage or net wage and then the total of reported bonuses is deducted from the reported wages. Next, the hourly wages are computed from the weekly hours, the wage period and the gross wages minus the bonuses. Then the hourly wages are converted into a standardised hourly wage in US dollars, using PPP on an annual basis.” This is done so wages can be compared based on the relative value under different currencies. Usage of MNE wages is different from previous studies (Kaufmann et al., 1999; Kaufmann & Kraay, 2002). These studies use per capita incomes, which is measured as gross domestic product (GDP) divided per capita. However, it is expected that MNE wages and per capita incomes are strongly correlated. Therefore, MNE wages is used in this study as dependant variable.
4.2.2 Independent variable
The independent variable in this thesis is the quality of governance. Kaufmann et al., (1999) construct six aggregate indicators corresponding to six fundamental governance concepts. The data used is based on a set of indicators that measure subjective perceptions regarding the quality of governance in different countries. The data are drawn from two types of sources: “polls of experts, which reflect country ratings produced by commercial risk rating agencies and other organizations, and cross-country surveys of residents carried out by international
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organizations and other non-governmental organizations” (p. 1). The six indicators are ranked with a score between -2.5 and +2.5, and are measured as follows:
1. Voice and accountability: “capturing perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media. This indicator measures various aspects of the political process, civil liberties and political rights. It also measures the extent to which citizens of a country can choose its government. Furthermore, independent media is important to monitor the government and who is responsible for certain actions” (Kaufmann et al., 1999, p. 7).
2. Political stability and absence of violence/terrorism: “capturing perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically‐motivated violence and terrorism. This indicator has an effect on the continuity of polices and on the ability of citizens to replace those in power” (Kaufmann et al., 1999, p. 7). The scores of this indicator are inverted to match the positive perceptions of the other indicators.
3. Government effectiveness: “capturing perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies” (Kaufmann et al., 1999, p. 8).
4. Regulatory quality: “capturing perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development” (Kaufmann et al., 1999, p. 8).
5. Rule of law: “capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and
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violence. This indicator measures perceptions of violent and non-violent crime, the effectiveness and predictability of the judiciary, and the enforceability of contracts. This is a measure to assess the success of a society in developing an environment in which fair and predictable rules form the basis for economic and social interactions” (Kaufmann et al., 1999, p. 8).
6. Control of corruption: “capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests” (Kaufmann et al., 1999, p. 8). Because of multicollinearity between the six indicators, this thesis uses two indicators as predictors of the quality of governance, which are political stability and regulatory quality.
4.2.3 Moderating variables
The two moderators are the bargaining power of trade unions and Euro-zone membership. Firstly, union density is used as proxy to measure the concept of trade unions. Jackson (2005) states that union density is seen as the dominant indicator to conceptualize and measure the strength of labour unions. This is an extensively used measure of union strength and collective bargaining power in firm- and industry-level studies (Vernon & Rogers, 2013). Union density is measured as net union membership as a proportion of wage and salary earners in employment. Secondly, being member of the Euro-zone is expected to play a moderating role between the quality of governance and MNE wages. The 15 countries included in this study are all OECD member countries. Not all of the OECD member countries are member of the Euro-zone. The countries are divided into subsets of Euro-zone membership in the year 2010, based on data available from the EU web page. There are eight countries that are member of the Euro-zone and there are seven countries that are not member of the Euro-zone. These subsets will be used to analyse the direct effect of political stability and regulatory quality on MNE wages within and outside the Euro-zone.
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4.2.4 Control variables
This study uses two control variables, which are country and industry. Country is included as first control variable because the quality of governance, MNE wages and trade unions differ across countries. The second variable that is controlled for is the type of industry in which the MNE operates. Different types of industries might pay higher or lower wages. The different type of industries are categorized into four groups according to the NACE-rev2.0 typology. NACE-rev2.0 aggregates industries into the following categories, notably (1) agriculture, manufacturing, construction; (2) trade, transport, hospitality; (3) commercial services; and (4) public sector, health care, education. The two control variables are defined as dummy variables that equal one if a MNE belongs to a country or industry and zero otherwise.
4.3 Model specification
The variables included in the analysis are political stability, regulatory quality, trade union and dummies for country and industry. Below is the regression function of MNE wages (WAGEHRPP), including a intercept, 𝛼 and error function, 𝜀.
𝑤𝑎𝑔𝑒ℎ𝑟𝑝𝑝 = 𝛼 + 𝛽1𝑝𝑜𝑙𝑖𝑡𝑖𝑐𝑎𝑙 𝑠𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 + 𝛽2𝑟𝑒𝑔𝑢𝑙𝑎𝑡𝑜𝑟𝑦 𝑞𝑢𝑎𝑙𝑖𝑡𝑦 + 𝛽3𝑡𝑟𝑎𝑑𝑒 𝑢𝑛𝑖𝑜𝑛
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The expectations for the regression are shown in table 1. Based on the previous literature, it is expected that political stability, regulatory quality and being member of a trade union has a positive effect on MNE wages. There is no exact expectation for country and industry effect. The analysis of model six till nine is an iteration of model two and three, which analyses the direct effect of political stability and regulatory quality on MNE wages. The difference is that the analysis is repeated within and outside the subset of Euro-zone member and non-member countries.
Table 1. Regression expectations
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Political Stability + + + + Regulatory Quality + + + + Trade Union + + Country ~ ~ ~ ~ ~ ~ ~ ~ ~ Industry ~ ~ ~ ~ ~ ~ ~ ~ ~
26 5. RESULTS
Table 2 shows the descriptive statistics of the dependant, independent, and control variables. The descriptive statistics show that the average wage (gross and controlled for PPP) of employees working for a MNE is 25.60 dollar per hour. The descriptive values also show that on average 30.39 per cent of wage and salary earners in employment is member of a trade union.
The variables are tested for multicollinearity by assessing the correlation between all the predictor variables. None of the variables indicate there is a high level of correlation (above 0.7). To further control for multicollinearity the variance inflation factors (VIF) and tolerance levels are calculated. A VIF value higher than 3 and a tolerance level below 0.2 are considered critical. Table 3 shows that most of the VIF values are around 1.4 and tolerance levels are all higher than 0.2. This indicates that multicollinearity is not problematic in this thesis.
Table 2. Descriptive statistics: means, standard deviations and correlations
Mean Std. Deviation (1) (2) (3) (4) (5) (6) 1. WAGEHRPP 25.603 14.119 1.000 2. Political Stability -0.755 0.386 0.683** 1.000 3. Regulatory Quality 1.392 0.332 0.150 -0.355** 1.000 4. Trade Union 30.393 21.910 -0.173 -0.490** 0.555** 1.000 5. Country 8.000 4.350 0.581** 0.424** -0.084 -0.295** 1.000 6. Industry 3.000 1.424 -0.091 0.000 0.000 0.000 0.000 1.000 ** p < 0.010, * < 0.050
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Table 3. Variance inflation factor tests for multicollinearity
Tolerance VIF Political Stability 0.658 1.520 Regulatory Quality 0.668 1.497 Trade Union 0.577 1.732 Country 0.793 1.262 Industry 1.000 1.000 Mean 0.739 1.402
Hypothesis 1a is tested using a multiple linear regression with MNE wages as dependant variable. The results in model 2, in table 4, show that the relationship between political stability and MNE wages is positive (B = 19.508, SE = 3.114) and based on the p-value (0.000) it can be concluded that this linear relationship is statistically significant. Together with the control variables 56.1 per cent of MNE wages is explained by political stability (Adj R²). This is in line with previous studies (Kaufmann & Kraay, 2002) where the level of explanation is similar. The F-score is 32.495 and the significance level is 0.000 which makes the regression model as a whole significant. The results of the regression analysis indicate that a higher level of political stability leads to higher MNE wages. Therefore hypothesis 1a is supported. This strong relationship is consistent with the discussed literature (Kaufmann & Kraay, 2002). The estimated coefficient of 19.50 implies that a one standard deviation improvement in the governance measure raises MNE wages enormously. This implies that the impact of governance on MNE wages is high.
The results in model 3, in table 4, indicate that the relationship between regulatory quality and MNE wages is positive and significant (B = 8.544, SE = 3.975, P = 0.035). Together with the control variables 36.0 per cent of MNE wages is explained by regulatory quality. The F-score is 14.855 and the significance level is 0.000 which makes the regression model as a whole significant. The results of the regression analysis indicate that a higher level of regulatory quality leads to significant higher MNE wages. Thereby hypothesis 1b is supported.
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A multiple regression model is used to investigate whether the relationship between political stability, regulatory quality and MNE wages is affected by employees that are working for a MNE and are member of a trade union. After centralizing the variables that measure political stability, regulatory quality and trade unions the interaction variables were computed.
The results in model 4, in table 4, show that higher levels of political stability are associated with higher MNE wages (B = 23.838, SE = 3.454, P = 0.000). The direct relationship between trade union and MNE wages is significant (B = 0.172, SE = 0.076, P = 0.027). However, the interaction between political stability and MNE wages is not significant (B = 0.178, SE = 1.507, P = 0.907). This suggests that the relationship between political stability and MNE wages is not affected by trade unions. Thereby rejecting hypothesis 2a.
The results in model 5, in table 4, show that higher levels of regulatory quality are associated with higher MNE wages (B = 12.435, SE = 4.225, P = 0.004), while trade unions is not (B = 0.101, SE = 0.082, P = 0.222). However, the interaction between regulatory quality and MNE wages is significant (B = -6.976, SE = 1.587, P = 0.000). This suggests that the relationship between regulatory quality and MNE wages is affected by trade unions. Surprisingly, this relationship is negative which suggests that trade unions mitigate the ability of governments to formulate and implement sounds policies and regulations that permit and promote private sector developments, resulting in lower MNE wages. This result partially supports hypothesis 2b.
Regarding the control variables, there is significant support for a positive country effect on MNE wages. The industry in which MNEs operate does not affect MNE wages. Therefore the variation comes from the country-level. Model six until model nine control for country effect, i.e. whether this effect comes from inside or outside the Euro-zone.
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The results in model 6, in table 5, indicate that the relationship between political stability and MNE wages of Euro-zone member countries is positive and significant (B = 17.331, SE = 2.172, P = 0.000). Together with the control variables 66.7 per cent of MNE wages is explained by political stability. The F-score is 27.087 and the significance level is 0.000 which makes the regression model as a whole significant. In comparison, the results in model 7, in table 5, indicate that the relationship between political stability and MNE wages of non-member Euro-zone countries is also positive and significant (B = 36.551, SE = 7.606, P = 0.000). Together with the control variables 68.2 per cent of MNE wages is explained by political stability. The F-score is 25.254 and the significance level is 0.000 which makes the regression model as a whole significant. The results of the regression analysis indicate that a higher level of political stability in both Euro-zone member and non-member countries lead to higher MNE wages. Thereby hypothesis 3a is rejected.
The results in model 8, in table 5, indicate that the relationship between regulatory quality and MNE wages of Euro-zone member countries is not significant (B = -7.076, SE = 4.694, P = 0.140). Together with the control variables 17.7 per cent of MNE wages is explained by regulatory quality. The F-score is 3.801 and the significance level is 0.018 which makes the regression model as a whole significant. In comparison, the results in model 9, in table 5, indicate that the relationship between regulatory quality and MNE wages of Euro-zone non-member countries is positive and significant (B = 23.222, SE = 5.571, P = 0.000). Together with the control variables 64.4 per cent of MNE wages is explained by regulatory quality. The F-score is 21.494 and the significance level is 0.000 which makes the regression model as a whole significant. The results show that regulatory quality has no significant effect on MNE wages within the Euro-zone, whereas outside the Euro-zone there is a significant effect of regulatory quality on MNE wages. This result partially supports hypothesis 3b.
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Regarding the control variables, the industry in which MNEs operate does not affect MNE wages. There is significant support for a positive country effect on MNE wages outside the Euro-zone, whereas inside the Euro-zone there is no country effect. This helps explain the result of model 8, hypothesis 3b, that within the Euro-zone there is no difference between countries regarding regulatory quality. This is because the monetary policy for these countries is set by the ECB. Since there is no difference between Euro-zone member countries, a change in regulatory quality does not affect MNE wages. Whereas, a change of regulatory quality of the different countries outside the Euro-zone does affect MNE wages.
31 Table 4. Results regression analysis (dependent variable: WAGEHRPP)
Model 1 Model 2 Model 3 Model 4 Model 5
(constant) 13.214** (3.995) 33.806*** (4.607) 0.884 (6.935) 31.162*** (4.488) -2.622 (6.172)
Independent variables
Political Stability 19.508*** (3.114) 23.838*** (3.454)
Regulatory Quality 8.544* (3.975) 12.435** (4.225)
Trade Union 0.172* (0.076) 0.101 (0.082)
Political Stability x Trade Union 0.178 (1.507)
Regulatory Quality x Trade Union -6.976*** (1.587)
Control variables Country 1.886*** (0.309) 1.153*** (0.276) 1.940*** (0.303) 1.248*** (0.268) 1.795*** (0.281) Industry -0.899 (0.945) -0.899 (0.764) -0.899 (0.922) -0.899 (0.728) -0.899 (0.815) Model fit N 75 75 75 75 75 R² 0.346 0.579 0.386 0.629 0.534 Adj R² 0.327 0.561 0.360 0.602 0.501 F-stat 19.016 32.495 14.855 23.352 15.834 P-value 0.000 0.000 0.000 0.000 0.000 *** p < 0.000, ** p < 0.010, * < 0.050
32 Table 5. Results regression analysis (dependent variable: WAGEHRPP)
Model 6 (EURO) Model 7 (N-EURO) Model 8 (EURO) Model 9 (N-EURO) (constant) 41.848*** (3.848) 42.884*** (9.646) 33.113** (8.746) -28.355** (9.384) Independent variables Political Stability 17.331*** (2.172) 36.551*** (7.606) Regulatory Quality -7.076 (4.694) 23.222*** (5.571) Control variables Country 0.083 (0.299) 1.419** (0.419) 0.876 (0.446) 2.388*** (0.371) Industry -1.289 (0.634) -0.425 (1.206) -1.289 (1.011) -0.425 (1.276) Model fit N 40 35 40 35 R² 0.693 0.710 0.241 0.675 Adj R² 0.667 0.682 0.177 0.644 F-stat 27.087 25.254 3.801 21.494 P-value 0.000 0.000 0.018 0.000 *** p < 0.000, ** p < 0.010, * < 0.050
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6. DISCUSSION
North (1990) emphasizes the importance of formal institutions to enforce rules and laws to structure political, economic and social interaction. Malfunctioning government institutions constitute a severe obstacle to economic development (Mauro, 1995). Kaufmann and Kraay (2002) state that good governance leads to better economic development. Their findings suggest that the quality of governance and per capita incomes are strongly positively correlated across countries. In line with this previous study, hypothesis 1a and hypothesis 1b show that political stability and regulatory quality play an important role in the height of multinational wages. The results show that higher levels of political stability and regulatory quality positively influences MNE wages. In fact, the estimated coefficients imply that an improvement in political stability and regulatory quality raises MNE wages drastically. This strong relationship is consistent with the study conducted by Kaufmann and Kraay (2002).
The analysis of the moderating effect of trade unions on the relationship between the quality of governance and MNE wages deserves attention. As shown in hypothesis 2a, when political stability is used as predictor variable, no moderating effect appears. However, hypothesis 2b shows that there is a significant moderating effect of trade unions on the relationship between regulatory quality and MNE wages. Surprisingly this effect is negative, suggesting that trade unions mitigate the ability of governments to formulate and implement sound policies and regulations that permit and promote private sector developments. This means that governments implement market-unfriendly policies such as price controls and that “there are excessive regulations in areas such as foreign trade and business development” (Kaufmann et al., 1999, p. 8). The negative moderating effect of trade unions on MNE wages is not in line with previous studies (Freeman, 2009; World Bank, 1995). However, the results comply with the
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earlier World Bank’s 1990 Development Report (World Bank, 1990), which states that labour market policies raise the cost of labour and reduce labour demand, and thus depress labour incomes. A possible explanation is that in developing countries trade unions play a crucial role in economic development, whereas in developed countries the main objectives of the trade unions are already turned into legislation. Any further intervention of trade unions in developed countries make it more difficult for governments to stimulate private market development, with lower wages as result.
Being a member or not being a member of the Euro-zone has an effect on MNE wages. The results of hypothesis 3a indicate that political stability in both Euro-zone member and non-member countries positively influences MNE wages. Interestingly, this is not the case for the regulatory quality of the Euro-zone member countries. The results of hypothesis 3b show that within the zone regulatory quality has no effect on MNE wages, whereas outside the Euro-zone regulatory quality is positively associated with MNE wages. This can be explained by that the monetary policy for Eurozone member countries is set by the ECB, which means that the regulatory quality of these countries is similar, thus a change in regulations does not affect MNE wages. In contrast, there is a difference with and between non-member countries, thus a change in regulatory quality does affect MNE wages.
6.1 Academic relevance
This thesis contributes to the existing literature on how the quality of governance affects multinational wages and by investigating the moderating roles of being member of a trade union and being part of the Euro-zone. As expected, the results suggests that higher levels of political stability and regulatory quality leads to higher wages for employees working for a multinational. This means that the lower the likelihood that the government will be destabilized or overthrown
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by unconstitutional or violent means, including politically‐motivated violence and terrorism, the higher the wages. Furthermore, the better the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development, the higher the wages.
Existing research shows that good governance leads to better economic development (Kaufmann et al., 1999; Kaufmann et al., 2011). This means that the quality of governance and per capita incomes are strongly positively correlated across countries. This study supports these outcomes in the specific context of MNE wages. However, it is interesting to note that there is no significant relationship between regulatory quality and MNE wages within the Euro-zone.
The results show that there is a negative moderating effect of trade unions on the relationship between regulatory quality and MNE wages. This is surprising, since it is contrary to a common view in the literature that states that trade unions have bargaining power to influence politics to enforce higher wages (Corneo, 1995; Freeman, 2009; Oswald, 1985; Waddock, 2008; World Bank, 1995). A possible explanation is that trade unions have become too powerful in influencing politics that, as a result, private sector development in developed countries is declining. This decline results in lower wages paid to employees working for multinationals.
The results of this thesis show that there is a significant difference between OECD countries. Findings suggest that there is no significant relationship between regulatory quality and MNE wages of Euro-zone member countries. On the contrary, the results show a significant effect between regulatory quality and MNE wages outside the Euro-zone. A possible explanation is that Euro-zone member countries have similar regulations because there are strict requirements to become a member of the Euro-zone.
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6.2 Practical contribution
The findings of this study have both managerial and policy implications. First, when companies look for locations to set up subsidiaries they should look at the political stability and regulatory quality of the country. A firm that is looking to attracted skilled labour, where higher wages are common, should locate their company in a country where there is a high level of political stability and a strong regulatory quality. On the contrary, when companies are in search for a competitive advantage where low labour costs are essential, firms should locate their subsidiaries in a country with a low level of political stability and regulatory quality. These findings are in line with previous studies (Bhagwati et al., 2004; Meyer, 2004; Spar & Yoffie, 1999).
Second, trade unions are organizations that represent employee interests and have bargaining power, provided by their members, to influence politics to enforce higher wages (Corneo, 1995; Freeman, 2009; Oswald, 1985; Waddock, 2008; World Bank, 1995). The findings show that trade unions negatively moderate the relationship between regulatory quality and multinational wages. This means that trade unions mitigate the ability of governments to formulate and implement sound policies and regulations that permit and promote private sector development. Trade unions should re-evaluate their bargaining strategies because the current negotiation style has a negative effect on employee wages. This is a very important implication since trade unions are achieving the opposite result of what they represent.
Third, the findings suggest that being part or not being part of the Euro-zone as a country has an effect on MNE wages. The results show that within the Euro-zone countries have similar regulatory qualities because these policies were set by the ECB, whereas outside the Euro-zone countries have different regulatory qualities. It is for Euro-zone member countries not interesting to change regulations because it has no effect on MNE wages. However, for non-member
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countries it is interesting to improve the regulatory quality if the country wants to have higher wages. These higher wages could attract skilled labour and as a result multinational firms might want to locate their company there.
6.3 Limitations and suggestions for future research
There are some limitation of this research that need to be acknowledged. Firstly, the WageIndicator database does not specify individual MNEs. Therefore, MNE wages are aggregated on country-level. For future research this study can be expanded by including wages on firm-level. In this way it can be explored whether MNEs operating across multiple countries have different wages between the headquarters and subsidiaries, and if this is influenced by the quality of governance. Furthermore, size, return on assets (ROA) and other variables can be included as control variables.
Secondly, the databases that were used did not make a distinction between gender, and between skilled and unskilled labour of employees working for a multinational. There can be a significant difference in wages paid for employees working for the same company. Therefore, future research should include gender and skills on an individual or firm-level of analysis.
Thirdly, this study uses political stability and regulatory quality as predictor variables for the quality of governance. These two variables are used because of the multicollinearity between the six quality governance indicators. Future research can expand this study and address the same research question by using other governance indicators by first solving the multicollinearity problem.
Fourthly, the moderating variable trade unions uses union density as proxy and is measured as net union membership as a proportion of wage and salary earners in employment. This is not limited to employees working for MNEs alone. A suggestion for future research is to
