The role of governance and job sector in determining MNE wages

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University of Amsterdam

The role of Governance and job Sector in Determining MNE Wages

By: Omry Shemesh (student ID: 10736328) Supervisor: dr. Ilir Haxhi

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Statement of originality

This document is written by Omry Shemesh 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.

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ABSTRACT

Previous literature on institutional context and MNE practices highlights the positive relation between stability in governance and the working environments; however, the effect of good governance on the multinational wages has been underspecified. In this study we explore the role of governance and job sector in determining MNE wages1. More particularly, we analyse the effect of the labor laws and regulations on the relationship of industry and the political stability on the multinational wages. In addition, we explore the effects of this whole paradigm on the country of origin of the multinational enterprise. We argue that the type of work (labor or intellectual); labor regulation (in developed and developing countries) and political stability significantly affects wages of multinational enterprises. Our analysis reveals that the effect of political stability diminished, while that of the labor regulation persisted. Also, the countries with a high degree of political stability and regulated labor policy enjoy higher wages. Also the findings have supported the initial hypothesis of labor regulation affecting the multinational wages deeply..Considering the wages as a relevant indicator of economic prosperity of a country, our study contributes to the literature on MNEs practices by showing that governance indicators could be seen as predictors of the state of a country’s economy that have a bearing on economic circumstances of an individual.

Keywords: Wages, political stability, industry, labor regulation, moderating factor

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The data used in this research is taken from Wage Indicator database, published by the University of Amsterdam, in conjunction with the World Bank Data on governance indicators. The authors are thankful to them for making this research possible.

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1. INTRODUCTION

Recently after the crisis of 2008, the economical fluctuation all around the world has seriously raised the concerns about employee retention in organizations. There have been major studies executed to see what might be the future trends and what have been observed till now. Also this includes analysis of the problems and issues involved in this. The most important factor identified in this research is the wages.

In addition, the economical conditions in countries are influenced by the governing bodies and rules. The strictness of the regulations derive the prosperity and stability of the companies. Governance has been measured by studying and analyzing the key contributing factors in different countries to figure out their effects on the economical developments. This has been done using six major indicators namely voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption.

Globalization has brought countries together on one platform. Multinational enterprises (MNEs) are the most prominent bodies out of this alliance. The data related to different aspects of the governance and its quality is available but analyzing it in different situations needs specific factors to be studied in depth. This study is focused to explore the effects of political stability and work sector on the multinational wages by considering the influence of the labor laws and regulations on this relationship.

Previous literature provides analysis on different aspects and factors which act as a deriving factor of the economical condition of the countries and the world. This study aims to highlight the effects faced by the home country after a multinational enterprise has invested in the host country. The relationship between the political stability and the work sector has been studied. Literature has evidences of exploring the effects of political stability and governance on MNE wages, (Bom, R., 2015). But the effects and relationship of these on the home country is still unexplored.

The decreasing economical stability for even the developed countries is enforcing a reduction in wage consumption which eventually is creating issues from the employees towards an increase in their wages. This has enhanced the need to study what are the

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optimal wages for different jobs and levels around the world. Also the economical instability and fluctuations affect the wages substantially. This demand is the basis of this study to explore the effects of economical instability on the wages of multinational companies. The multinational (MNE) companies have their offices in different countries and they hire employees from these countries. Also some companies intentionally derive their labour regulations softly so that they can offer lesser wages with less hard regulations. This stands as a huge concern for these companies to decide wages for employees for same job and level in different countries.

Our results show that developed countries with high regulation of labor have significantly higher wages compared to free labor countries, in this regard; country does have influences on the wages paid. This result is prominent because it allows for an analysis of global wages for countries that typically outsource work (e.g., Australia and Germany) and companies that are recipients of outsourced work (e.g., Brazil and India). Also, the countries with a high degree of political stability and regulated labor policy enjoy higher wages. The linear regression problem solving approach has been used which has authenticated the hypothesis proposed in this study. It has been explored how the strength of a country’s position in the global world affects its economical numbers and its relationships to the multinational company’s wages. This study has been done by modelling the problem of effects on multinational wages using linear regression approach. The different parameters are differentiated by dividing them into dependent, independent, moderating and controlling variables. The analysis has been done using the data of four major countries, Australia, Brazil, Germany and India in the data obtained from World Bank.

It could be said that by considering the section to which job belongs as well as the political and legal situation, this study makes the evaluation of prominent factors in determining wages of multinational enterprises, much more comprehensive than previous works. The labor regulation has been considered as a moderating factor in this study. In addition, the influence of the host country on the wages of the multinational enterprises has been studied.

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Political instability regulates the wages of the employees in country and also influences the minimum wages. Generally increasing the minimum wages of a country too much reduces the rate of employment, (Chacaltana, J. 2009). Also, stable politics in a country encourages effective and sound wages for its employees (Chacaltana, J. 2009).Even if the stability of a country in terms of its political condition is strong, the labor laws still are more controlling factor for the wages for multinational enterprises.

Strong and flexible labor laws define better wages and salaries as compared to strict regulation (Chacaltana, J. 2009). This in turn increases employment and its attractions. Thus, in this study, political stability and the job market in a country are the independent factors affecting the dependent variable of multinational wages. This relationship is regularized by thelabor laws and regulations.

The previous studies have shown the relationship between the political stability and the wages of companies in a country. Also there has been analysis done on the effects of political soundness on small and medium sized enterprises and the economical performance of the MNE has been studied in terms of its effects on the host country, (Figini, P. & Gorg, H., 1998). Increasing growth and globalization has erased the geographical boundaries and demands companies to operate without any borders all around the world.

The main idea of this research is to explore what are the effects of the wages on a country’s policies and job structure. The research is targeted to consider two main problems or questions:

Research question1: What is the effect of industry and political stability on multinational (MNE) wages?

In this study we explore the role of governance and job sector in determining MNE wages. We argue that the type of work (labor or intellectual); labor regulation (in developed and developing countries) and political stability significantly affects wages of multinational enterprises. The stability of the government and importance of labour regulation is also explained. The factors involved in economical changes in a country are

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seen.

Research question 2: How the relationship between the industry and political stability, and MNE wages is moderated by the countries of origin of the MNE? The main target of this thesis is to explore the influence on the MNE wages by studying the core factors of governance and job sector. The laws and regulations practiced in different countries are also studied for effects on the relationship of governance and work sector with MNE wages.

This study has been done by exploiting the multiple regression problem solving methods. Data from the World Bank has been collected and regression tables are formed. The basic contribution of this study is the analysis and study of the relationship of governance and work sector on the wages of multinational enterprises in presence of the labor regulations. The results and finding have been promising and have revealed that labor regulations dominate the political stability in effecting and determining the MNE wages.

The data available will be analyzed using the multiple regression techniques and in depth analysis is done on the extracted information. Regression tables clearly identify the relationships and significance of different independent and control variables on the dependent variables.

This thesis will be structured as following. Chapter 2 will provide a literature review of the previous studies done in this domain and will develop a theoretical framework and hypothesis. Then, Chapter 3 details the methods used to execute this study. Chapter 4 provides the results and analysis followed by the discussion in Chapter 5 summarizing the possible future areas of research to which this study can be exploited. Finally, Chapter 6 concludes the basic objective of the study with the goals that have been achieved. The achievements made are highlighted and summarized.

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2. LITERATURE REVIEW

2.1 Global wage growth and world economy

Wages of employees is directly related to their professional outcomes. The more they are satisfied in terms of the incentives and more importantly the money they are paid, more happily and with satisfaction they work. Thus, it stands essential to keep these wages appropriately balanced to the work the employees do.

Development of the salary structure in an organization is a crucial element to ensure strong ties of the employees to their responsibilities. Any variations in terms of unjustified pays at any level may disturb the hierarchy of the organization. If organizations do not pay attention to this area, there overall performance, profitability and competitiveness is affected, (INWORK, 2014). This on a broader level disturbs the economy of a country by variations in the amount of these wages spent on the household items. Balanced wages are also a strong contributor to reduce poverty.

The salary and wages defined for a specific job are generally balanced to be same but these have no comparison to the ones paid to workers in other countries. This is due to the differences in the economical, political and labour regulations in the country.The importance of wages in deriving the economical welfare of countries has become an attractive topic of discussion over past few years, (INWORK, 2014). The global wages and economy was hugely affected by the crisis in 2008 and 2009. The numbers got better by 2010 and then showed a downfall again. This again got raised in 2013 and still is bound to the ones in 2006 and 2007, (INWORK, 2014).

According to the research by ILO, the global wage growth is controlled by the flourishing and developing countries with emerging economies. This has directly influenced the amount of wages for every job and level. But it has been observed that this rise is highly dependent on the region on the globe, (INWORK, 2014).

Countries like Latin America have faced less increase in wages as compared to Asia and Eastern Europe. Also regions near Saudi Arabia have also undergone significant wage growth. According to INWORK (2014), Chine contributes half of the world’s

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economyand it has been estimated that its wage growth has been huge as compared to other countries due to its size and strengths. This figure has been notified as being 2 percent as compared to 1.1 percent in 2013 if China is excluded fromthe world wage growth numbers, (INWORK, 2014).

The wages have stayed flat for even the developing countries after the crisis in 2008. Even the wage growth has been less as compared to 2006 and 2007.one of the most contributing factor towards this change is the employee retention, (INWORK, 2014). Also the labour productivity growth has increased in developed countries as compared to other underdeveloped countries. Also the share of GDP towards the labour compensation has decreased in the developed countries. These trends have been different in emerging countries, (INWORK, 2014). This shows that the economy of a county has effects on the wages of its workers.

2.2 Influences on wages

The inequality in wages at same as well as different job levels result in economical disturbance within the employees and thus the organization. Income and wages are two different terms. Income includes earnings from investments while wages are only related to the income earned related to a work and is concerned with income of employment. Wages are effected by many factorsin a country and also wages are influenced by national and international standing of the organization as well.

2.2.1 Wages inequality and GDP

Literature has evidence of betterment in income and wages if the economical condition of the country is satisfying.Kuznet (1955) has studied and evaluated that gross domestic product (GDP) and wage or income inequality is related. As the GDP increases, inequality increases initially but finally decreases.Many studies have agreed to this study but according to Ram (1997), the relationship is an inverse actually. Such contradicting studies make it unclear to definitely comment on the exact relationship between GDP and inequality.

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2.2.2 Wages and the ‘supply and demand model’

It has been seen that the demand for highly skilled workers have increased since 1970, but the supply of such highly educated people is less. This inequality in skill mismatch has also lead to increase in wages (Howell, 2002; Morris & Western, 1999). Also it has been observed that the need and desire for low-skilled workers have decreased as compared to the experienced and educated employees causing a linear decrease in the wages as well

(Morris & Western, 1999; Howell, 2002).

2.2.3 Wages and size of government sector

Studies have shown that wages and their inequalities are also influenced by the size of the government sector, (Garret and Way, 1999). The supporting argument behind this is that the public-sector supports stability in wages as compared to the private sector.

2.2.4 Wages and centralization of wage-bargaining

Wage bargaining involves negotiations between the two parties, the employers and the workers, about the pay. Research and analysis has revealed that wages are more closely packed for different job levels and are more symmetrical in countries with centralization of wage-bargaining system, which gives strength to making the wage structure more realistic, (Oskarsson, 2005; Pontusson et al., 2002; Rueda & Pontusson, 2000; Wallerstein, 1999).

2.3 Wages and workers

Workers and employees are educated differently for different job levels. Inequality is highly dependent on this differentiation of wage gaps in workers. The analysis and in depth understanding of the reasons of why these gaps exist is important to resolve the issues arising due to them.

The discrimination of workers based on gender and specifics of the individuals are also a reason of wage inequality. This results in workers facing discrimination and contains drawbacks in the job environments. Labor markets and the policies which

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govern the laws for workers can regulate this inequality and discrimination. The minimum wages set for different jobs and work levels can standardize the wages and diminish these problems, but in spite of these laws, there are discrimination problems.

2.4 Multinational enterprises, MNE

Multinational enterprise or corporation is an organization which has its base in other countries in addition to the host country. The presence of MNEs results in foreign direct investments (FDI). FDI is a foreign governing body in one country with the other entities based in other countries. This results in the country’s economy to be regulated by the foreign company.

With the increasing utilization of overseas business structures like MNE, outsourcing became an essential factor contributing to the world’s economy. In general, outsourcing of work tends to utilize unskilled labor in lower wage countries (Munch and Rose Skaksen, 2009). Such outsourcing tends to create two effects, namely the comparative advantage effect and the division of labor effect. According to Munch and Rose Shaksen (2009), if outsourcing is done for the purpose of specialization and division of labor (i.e., to fill a gap in skills and to ensure that the best skilled people do the work), then as long as it is done domestically (i.e., the work is not farmed out overseas), it leads to increase in wages for skilled as well as unskilled workers. If outsourcing is done for the purpose of filling a gap in skills, it is inherently positive and leads to overall improvement in wages for outsourcer as well as the outsourced party. However, this is limited to domestic outsourcing only and for this reason wage differentials have been extensively studied by the research community.

However, over the time, resurgence of economics has found some effects on working conditions and consequently on wages. For example, South Korean manufacturers like LG and Samsung no longer are among low-wage and low-quality sectors, who need to the corporations of western for direction. Contrarily, now they are able to be innovative and competitive on their own. Similar trends are being observed with respect to information technology (IT) outsourcing to India and Philippines and correspondingly

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wages have been significantly on the rise (Estavillo, 2006).

The existing researches are majorly focused on aspects such as inter-industry wage distribution, (Gatica, Mizala, &Romaguera, 1995). Industry emphasizes on the nature of work, for instance, in the mining industry, wages tend to be higher than other industries. In this research work, we consider the level of labor regulation, which so far has not been studied tremendously.

2.4.1 MNE and wages

Wages of the multinational enterprises largely depends on the country where the wages are to be paid. The political stability and the national economical figures largely derive the corresponding wages. The study by Konings (2006) shows that the wages in parent firms in multinational organizations are positive and considerably higher as compared to the affiliate’s labor costs.

Multinational companies are playing a vital role in deriving the wage inequality. They have introduced newer and emerging technologies and are also responsible to transfer them to other countries. Studies have shown that the multinational companies outsource the production tasks and thus this directly effects the wages at different job levels to increase. This in turn enhances the demand for skilled labor. These factors are deriving the wage sin the developing countries by the multinational enterprises from developed countries, (Figini, P. & Gorg, H. 1999).

2.4.2 Effect of governance

A study by Heyman, F. et. Al. (2011) explored the data set of a set of firms with 50% of the employees being Swedish. The study revealed that it is the acquisition which is important as compared to the ownerships which effect the wages. The foreign acquisitions of the domestic firms result in substantial increase in wages of managerial positions as compared to the lower ranks.

Many other studies have been done to see the impact of governance on wages, (Kaufmann, & Kraay, 2002). Study by Detomasi (2006) has shown that global public

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policy networks (GPPN) base don corporation social responsibility (CSR) result in better collaboration between the industrial sector and the government. This will elaborate and clarify the social connections and obligations on the multinational bodies. The study has highlighted the ways of how MNEs and the global economy can work hand in hand.

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3. THEORETICAL FRAMEWORK

Literature analysis has shown that the political stability and the job sector are determining and influencing factors towards the wages. Also the labor regulation has affected the wages to considerable level. These effects have been studied theoretically but a detailed analysis is required to place a final argument. This demand has given rise to this research.

3.1 Job sector

Job in the job/work sector has been categorized as following (1) manual and (2) intellectual. Manual jobs involve the use of a person’s physical capacity, mental ability as well as skills gained through experience. Examples of manual work include manufacturing, transportation, mining, etc. Intellectual work on the other hand involves primarily activities such as reading, writing, analyzing and computing. Jobs of engineers, accountants, editors, computer professionals, etc., all fall under this category. It must be noted in some engineers like architectures may be physically working in the field; however the nature of their work still remains intellectual, since they are involved in gathering data or performing inspections.

It has been common that an intellectual work with highly developed scientific paradigm may lead to a better pay comparing rather than physical one (Konrad and Pfeffer, 1990). Literature supports that wages in multinational enterprises are determined and affected by the work type. In order to investigate the consistency of this finding nowadays, we analyze the following hypothesis:

H1: The type of work (labor or intellectual) significantly affects wages.

3.2 Labor regulations

Labor regulation is based on the government orientation for promoting freedom on labor’s wage laws such that employers cannot hire anyone unless they pay a minimum wage. This regulation in developing countries is majorly based on the fact that firms pay good wages to resolve the worker incentive problem.

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Accordingly, economists believe that the effect of a binding minimum wage law is to move firms backward along the demand curve for low skill workers (Rebitzer and Tylor, 1995). Here we distinguish labor regulation hinge on the development in a country. It captures the fact that developing countries offer low wages because of less strict regulation on employment while developed counties have well suited minimum levels of payment for jobs. Therefore, wage is highly dependent on the country of employment. Although this classification is not automatic, this could make a considerable difference between developed and developing countries. The following hypothesis is proposed.

H2: Labor regulation (in developed and developing countries) significantly affects

wages.

3.3 Political stability

Ake (1975) defines political stability as the regulating factor for the flow of political exchanges through the time. This avoids members of society to act against the political role expectations. Furthermore, political stability and the absence of violence and terrorism is one of the six indicators proposed by Kaufmann and Kraay (2002), which encompass the state of governance prevailing in a country. The World Bank has published data for all 6 variables for most countries. It is plausible to assume that countries with high political stability tend to have higher wages. Based on this fact hypothesis 3 is developed:

H3: Political Stability significantly affects wages.

This study has been done by analysing the different variable of the system including the independent, dependent and moderating variables. The system has a moderating variable which is responsible to effect the interaction between the dependent and independent variable. Figure 1 shows the theoretical scheme of this study. It illustrates the dependency of wages on nature of work, political stability and labor regulation as a moderator. If the moderator inclusion yields significant dependence while reducing the significance of some other independent variables, this indicates the presence of moderation phenomenon.

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It is evident by the study that the moderated regression does reduce the significance of other independent variables, signifying the presence of moderation. By definition, moderation means moderating or intensifying the relationship between two variables by the third variable (see Figure 2).

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Figure 1: Conceptual

framework

Figure 2

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4. DATA AND METHOD

4.1 Sample and data collection

A linear regression problem solving approach has been taken up in this research. In addition to understanding the dependence of wages on governance as a regression problem involving in a statistical data analysis, there is also a sociological element to our discussion. Extremely low wages in China, exploiting Qatar's stadium workers and poor working conditions of seasonal workers employed in agricultural sector in the US (Mukherjee, 20195) all are examples of complicated situations to implement a modern well-regulated labor market. This study looks at countries such as Brazil and India considering this fact that wages are generally lower in countries with low regulations. The data used in this analysis is taken from variety of sources including wage indicator data set and World Bank data on governance. The wage indicator dataset was used to extend this analysis by choosing a wider range of data. In particular, data for Australia, Brazil, Germany and India has been analyzed. In total, over 700 salary data points were chosen. This looks a sufficient dataset. Moderated regression usually is an effective technique for large sample scenarios. Velicer (1972) suggested a minimum of 200 samples for ensuring an effective moderated regression analysis. We choose labor regulation as a moderator variable.

4.2 Measures

4.2.1 Dependent variables

Dependent variables are the core entities of interest in a research or study. They are the variables or quantities which are effected and also measured. The study is in fact done to see the variations in the dependent variables. Multination al (MNE) wages have been taken as the dependent variable. It is represented as WAGEHRPP. The variable WAGEHRPP has been selected, which represents the hourly wage converted into a standardized US dollar rate, based on purchasing power parity (PPP). It has been taken from the wage indicator database used in this research as a dataset. This variable helps in

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analysis and comparison of wage sin different currencies. This greatly simplifies the analysis and eliminates the need for currency conversions in this analysis.

4.2.2 Independent variables

Independent variables are the ones which stand as such and are not affected by any other quantities. The variations in dependent or other types of variables have no influence on independent variables. There are two independent variables in this research namely political stability and work sector. Kaufmann et. Al, (1999) has developed a framework of six indicators including voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption. These indicators help in subjective analysis of different countries in terms of their governance and economical conditions. As it has been discussed in the previous sections (Bom, R., 2015), political stability and work sector have been influential in determining wage; so, these two are counted as independent variables in our research study.

4.2.3 Moderating variables

Moderating variable is the quantity which effects or derives the strength of the relationship between the independent and dependent variables. Labor regulation has been taken as the moderating variable in this study. The studies have shown that regulations about labor in a country derive the level of wages in MNE, (Chacaltana, J., 2009).

4.2.4 Control variables

Control variables are the ones which show no change and remain constant for an experiment. It has strong effect on other variables. Constant nature of control variables help to test the values for the independent variables. The control variables used in this study are country and industry.

Multinational wages are highly influenced by the region of the world the country resides in. Also the internal economical and political stability of the country affects the

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multinational wages. Multinational wages are also greatly affected by the industry the multinational firm performing its services. Different industries and firms acting in different areas of the market pay variable wages. They may be higher or lower depending on the sector or level of the job market they belong to. NACE-rev2.0 topology categorized the industries into four main categories; (1) Agriculture, manufacturing, construction; (2) Trade, transport, hospitality; (3) Commercial services; and (4) Public sector, health care, education.

4.3 Model specification

Labor regulation serves as a basis to quantify governance on a measurement scale of -2.5 to +2.5 (Kaufmann & Kraay, 2002). For this analysis, the indicator values were modified by adding 2.5 to each in order to ensure that all values are positive and the minimum is zero. It must be noted that the developing countries have negative scores on many of the parameters. The variable WAGEHRPP has been selected as an independent variable to have a standard way to represent wages based on purchasing power parity (PPP).

Table 1 summarizes these indicators as obtained from the publication by World Bank (The Worldwide Governance Indicators, 2014 Update, 2014). The data chosen was the latest available, for the year 2013. Following six indicators: Voice and accountability, Political stability, Government effectiveness, Regulatory quality, Role of law and Control of consumption are present in the data for each of the four countries, Australia, Brazil, Germany, and India, as shown in table 1.

Based on our research and study, of these six indicators, only political stability is selected. The data obtained from the World Bank is analyzed for the above parameters. These parameters have been selected as they act as indicators World Wide governance for the year 2013. Governance, being the core component of analysis in our study, is being observed for its effects on the wages of multinational enterprises. Negative values in table 1 indicate weak governance, while positive values indicate strong governance. The data analysis shows the negative values indicate weak governance, while positive values indicate strong governance.

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The data analysis shows that Brazil and India have negative rating on some of the parameters. In data of Brazil, political stability, Government effectiveness, role of law and control of consumption are negative values and for India; political stability, Government effectiveness, role of law and control of consumption indicators shows negative values. This indicates weak governance in Brazil and India. However, Australia and Germany show high scores on most indicators. This shows strong governance in respective countries as values of all indicators are positive.

Table 1 indicates some values are positive and some are negative. So in order to eliminate the negative values, the data is manipulated by adding 2.5 to the whole data set. Table 2 shows the normalized values of governance indicators for four countries, after adding 2.5 to each value, such that the minimum possible value for any parameter is zero (thereby eliminating negative entries).

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Table 1: Worlwide governance indicators for 4 countries selected

Country Voice and Accountability Political Stabil ity Government Effectiveness Regulatory Quality Role of Law Aust ralia 1.44 1.02 1.62 1.79 1.75 Brazil 0.37 -0.28 -0.08 0.07 -0.12 Germany 1.41 0.93 1.52 1.55 1.62 Ind ia 0.41 -1.19 -0.19 -0.47 -0.10

Table 2: Worldwide Governance Indicators –

normalized by adding 2.5 to each value

Country Voice and Accountability Political Stabil ity Government Effectiveness Regulatory Quality Role of Law Aust ralia 3.94 3.52 4.12 4.29 4.25 Brazil 2.87 2.22 2.42 2.57 2.38 Germany 3.91 3.43 4.02 4.05 4.12 Ind ia 2.91 1.31 2.31 2.03 2.4

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5. RESULTS AND ANALYSIS

In addition to looking for theoretical framework on governance, this research also looks at the published data at World Bank website, which essentially represents the work by Kaufmann and Kraay (2002). This data is utilized in present study in order to assess the governance scales for four countries studied. Additionally, the wage indicator data set is also utilized, (Tijdens, & Osse, 2010).

A multiple linear regression model formulated in SPSS is solved to generate tabulated results including correlation coefficients and VIF values for various independent variables. Other studies involving wage differentials very often rely upon linear regression, especially where large amount of data is involved (Gatica, Mizala, & Romaguera, 1995).

Table 3 shows the descriptive statistics like mean and standard deviations of the dependant, independent, and moderating variables. The descriptive statistics show that the average wage (gross and controlled for PPP) of employees working for a MNE is 6.51 dollar per hour. It also shows that on average 0.71 per cent of wages are affected and influenced by the quality of the regulations related to employment and labor.

The descriptive table also provides the data related to the correlations between the variables. Correlation is a statistical measure that indicates the extent to which two or more variables fluctuate together. A positive correlation indicates the extent to which those variables increase or decrease in parallel, a negative correlation indicates the extent to which one variable increases as the other decreases and 0 indicate no correlation.

The political stability and the regulatory quality are highly positively correlated (above 0.7) to each other which shows the effect in one will positively influence the other making a mark difference to the wages of the multinational enterprises. Both political stability and regulatory quality are equally correlated to the MNE wages.

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Table 3: Descriptive statistics: means, standard deviations and correlations

Variable Mean Std Dev (1) (2) (3) WAGEHRPP 6.51 10.08 1.000 0.502 0.547 Political Stabili ty 0.07 0.97 0.502 1.000 0.989 Regulatory Qua lity 0.71 0.99 0.547 0.989 1.000 ** p < 0.010, * < 0.050

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Table 4 provides a good estimation about the multicollinearity between the predictor variables. In order to access the intensity of multicollinearity, the variance inflation factors (VIF) are calculated. A VIF value higher than 10 is considered critical. Table 4 shows that most of the VIF values are below but near 10. This indicates that multicollinearity is not problematic in this thesis.

Hypothesis 1 is tested using a multiple linear regression with MNE wages as dependant variable. The results in model 1, in table 6, show that the relationship between work sector defining the job types and MNE wages is negative (Beta = 0.237, SE = -0.358) and based on the p-value (0.000) it can be concluded that this linear relationship is statistically significant. Together with the control variables 25.6 per cent of MNE wages is explained by work sector (Adj R²). The F-score is 121.7 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 work sector job variations leads to lower MNE wages. Therefore hypothesis 1 is neglected. The estimated coefficient of -0.237 implies that a one standard deviation improvement in the work sector measure reduces MNE wages considerably. This implies that the impact of work sector and type of job on MNE wages is moderate.

The results in model 3, in table 5, indicate that the relationship between labor regulation and MNE wages is positive and significant (Beta = 3.975, SE = 11.247) and based on the P-value (0.000) it can be concluded that this linear relationship is statistically significant. Together with the control variables 37.0 per cent of MNE wages is explained by labor regulation. The F-score is 206.901 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 labor regulations leads to significant higher MNE wages. Thereby hypothesis 2 is supported.

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Table 4: Inter correlations and reliability

VIF Labor regulation Work sector Political Stability

Wage per hour

Labor regulation 1.005 1.000 .070 -.949 -.511 Work sector 9.984 .070 1.000 -.073 -.030 Political stability 9.981 -.949 -.073 1.000 .502

Wage per hour

_ -.511 -.030 .502 1.000 P<0.05

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Hypothesis 3 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 (Beta = 3.316, SE = 8.587) and based on the p-value (0.000) it can be concluded that this linear relationship is statistically significant. Together with the control variables 32.7 per cent of MNE wages is explained by political stability (Adj R²). This is in line with previous studies (Kaufmann & Kraay, 2002). The F-score is 171.33 and the significance level is 0.000 which makes the regression model as a whole significant. Thus the data extracted by linear regression evolves the positive effects of political stability on the wages of MNE. Therefore hypothesis 3 is also supported. The estimated coefficient of 3.316 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 multiple regression analysis is helpful to not only analyze the effects of variables on each other independently but also helps in collected analysis of all the variables. We have used it to investigate whether the relationship between political stability and labor regulation collectively influence the wages in a positive or negative manner. After centralizing the variables that measure political stability and regulatory quality, the effects are evaluated.

The results in model 4, in table 5, show that higher levels of labor regulations are associated with higher MNE wages (Beta = 35.534, SE =18.722, P = 0.000). The direct relationship between political stability and MNE wages is negatively significant (Beta = -33.782, SE = -16.837, P = 0.000). However, the statistics show that the relationship between political stability and MNE wages is negatively affected by strong labor regulations. Surprisingly, the relationship between the political stability and MNE wage sis negative in present of labor regulations which restricts the political influence on the MNE wages. This is supporting hypothesis 2 and partially hypothesis 3.

The results in model 5, in table 6, show that higher levels of work sector are associated with higher MNE wages (Beta = 3.982, SE = 11.237, P = 0.000), while labor regulations is not (B = 0.194, SE = 0.317, P = 0.000). However, the statistics show that

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the relationship between work sector and MNE wages is almost not affected by labor regulations.

Regarding the control variables, the country in which MNEs operate does not affect MNE wages.

The results in model 6, in table 66, show that higher levels of political stability are associated with higher MNE wages (Beta = 3.320, SE =8.574, P = 0.000). The direct relationship between work sector and MNE wages is not significant (Beta = 0.105, SE = 0.167, P = 0.000). However, the statistics show that the relationship between political stability and MNE wages is significantly affected by work sector and the level of jobs. This is supporting hypothesis 1 and 3.

The results in model 7, in table 6, show that higher levels of labor regulations are associated with higher MNE wages (Beta = 35.535, SE = 18.712, P = 0.000). The direct relationship between work sector and MNE wages is not significant (B = 0.127, SE = 0.246, P = 0.000). Also, the relationship between political stability and MNE wages is negatively significant (B = -33.778, SE = 18.712, P = 0.000). This suggests that the relationship between political stability and MNE wages is affected by the labor regulations and the work sector. This fully supports hypothesis 1 and 2 while partially supports hypothesis 3.

The results in model 8, in table 6, show that higher levels of labor regulations are associated with higher MNE wages (B = 4.006, SE = 4.179, P = 0.000). The direct relationship between work sector and MNE wages is not significant (B = 0.247, SE = 0.120, P = 0.000). However, the interaction between labor regulation and MNE wages is not significant (B = -0.017, SE = -0.027, P = 0.000). This suggests that the relationship between work sector and MNE wages is affected by labor regulations. -1.663 is constant value and it means when all independent variables are zero, the model predicts that wage is -1.663 or decreased by 1.663. The negative relationship shows that the work sector is controlled by the power of labor regulations which reduces the MNE wages. This partially supports hypothesis 1 and fully support hypothesis 2.

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Table 5: Part 1 of the regression analysis (dependent variable:WAGEHRPP)

Model 1 Model 2 Model 3 Model 4 Constant 14.92(13.36) 3.272(2.272) -1.284(-.844) -12.036***( Independent variabl es Work sector -.237(-.358) Political stability 3.316***(8.587) -33.782***( Labor Regulation 3.975***(11.247) 35.534***(18.722) Work sector x Labor regulation Control variable Country -.038***(15.574) -.025(-8.987) -.024***(-9.033) -.041***(-16.856) Model fit N 700 700 700 700 R 2 0.259 0.329 0.372 0.554 Adj R 2 0.256 0.327 0.37 0.552 F-test 121.7 171.33 206.901 288.247 p-value 0 0 0 0

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Table 6: Part 2 of the regression analysis (dependent variable:WAGEHRPP)

Model 5 Model 6 Model 7 Model 8 Constant -1.585(1.794) 3.112(1.788) -12.232***(-7.456) -1.663(-.492) Independent variabl es Work sector 3.982*** -11.237 .105(.167) .127(.246) .247(.120) Political stability 3.320***(8.574) -33.778***(18.712) Labor Regulation .194(.317) 35.535***(18.712) 4.006***(4,179) Work sector x Labor regulation -.017(-.027) Control variable Country -.024***(-9.027) -.025***(-8.980) -.041***(-16.844) -.024***(-9.020) Model fit N 700 700 700 700 R 2 0.372 0.329 0.554 0.369 Adj R 2 0.37 0.326 0.551 0.369 F-test 137.79 114.07 215.904 103.194 p-value 0 0 0 0

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6. DISCUSSION

Inwork (2014) has suggested that the economic welfare of countries is highly dependent and related to the wages of the workers. Also the economic fluctuations in the global business market are affected by the political and general regional situations around the world. Kaufmann, D., & Kraay, A. (2002) have highlighted the positive impact of governance and political stability on the economical developments. They have stated that although governance is not guaranteed by the development but governance and per capita incomes are strongly and positively correlated across the countries. In line with this previous study, hypothesis 3 and 2 show that the political stability and the labor regulations influence the wages of the MNE. The results have indicated that substantial increase in these factors increases the multinational wages. These analyzed coefficients and statistics are validating the study by Kaufmann, D., & Kraay, A. (2002).

The analysis of the moderating effect of labor regulations on the relationship between political stability and MNE wages demands exploitation. Evident by the hypothesis 2 and its following results, labor regulations are positively correlated to the MNE wages while political stability is negatively affected by this relationship. The relationship between political stability and MNE wages has been found to be negative enforcing the misleading and unjust political importance to work incentives in the laws. This has also been highlighted in the study by Kaufmann, D., Kraay, A., & Zoido-Lobatón, P. (1999).

Work sector is defined as the working environment of the MNEs. The negative impact of work sector on the wages of MNEs is in line with the report by World Bank (1990). The report unfolded that labor regulations increase the wages while cutting down the labor demands and finally depressing the labor incomes. Also hypothesis 1 and 2 shows that work sector and MNE wages are positively correlated while labor regulation has no significance on this relationship.

The significance of country on the MNE wages has not been significant according to the analysis irrespective of the predictor parameter. Only the country becomes dominant and statistically significant on the relationship of work sector and the MNE wages. Work sector is independent of the job discrimination.

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6. 1 Academic relevance

This thesis contributes to the existing literature and research on how the governance and work sectors affect the multinational wages and by highlighting the roles of the moderating variables like labor regulations on these primary factors and relationships. In line with the hypothesis proposed initially, the results suggest that higher levels of political stability and labor regulations lead to higher MNE wages. This shows that the relationship between the governance and wages of the employees working multinationals is strongly correlated. Also, the stronger is the government in building strong regulations, the better will be MNE wages.

Existing literature shows good governance results in positive economic development, (Kaufmann, D., Kraay, A., & Zoido-Lobatón, P., 1999). This shows that the governance and per capita income is strongly and positively correlated across the countries. This study is in line with these results for MNE wages. However, it is interesting to note that the relationship between political stability, governance and MNE wages is unexpectedly and negatively impacted by labor regulations.

Research studies done in the past have focused more on the medium and small enterprises for their analysis, (Chacaltana, J. 2009). The emphasis on the multinational enterprises has been very less. This study has contributed in highlighting this aspect of corporate sector. The effects of labor laws and regulations can be both positive and negative but most of the studies have taken the negative trends and effects, (Chacaltana, J. 2009). The need to study multinational enterprises and also to see for the effects of labor regulations on the wages was highly in demand. This study has fulfilled this gap in providing the owners of MNEs the analysis in different regions of the world about effects of important factors like political stability and governance on their wages.

The results of this thesis show that country has no impact on the relationships of labor regulations and political stability with the wages of the employees working in the multinationals. But the impact of country on the relationship between work sector and MNE wages has been statistically significant. Thus, the country where the MNE wages are being applied show resilient effect on these wages.

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6.2 Practical contribution

The findings of this study have political and global economical advantages. The findings and analysis done in this study are important for both managerial and the common workers of multinational enterprises. This study helps in managing the wages of the multinational companies. Firstly, It gives a clear analysis of the facts associated with the wages of the multinational enterprises and the political stability and governance of host country. Enterprises which aim to associate the labour tasks with highly paid individuals, they must analyse the political stability of the country to be high. In case companies are looking for providing low wages to its employees, then political stableness does not have much importance to be high.

Secondly, the multinational wages also effect the situation in the home country. The political stability and the work sector define the wages of MNE while this relationship has an effect on the country of origin of the multinational enterprise. The companies aiming to invest in other countries to expand or develop their businesses can benefit from this study in terms of analysis of the effects of their wages on the home country. The political stability and work sector of the host country and the wages of the multinational enterprises collectively derive the situation in the country of origin of the MNE.

6.3 Limitations and suggestions for the future

This research has associated limitations that need to be highlighted. Firstly, the data adapted for this study comprises of four countries. Two of these are high-income countries while the remaining two, India and Brazil, are from BRIC countries. This choice limits the representation of low and middle-income countries. However, as these countries are called newly advanced economies so they may be taken as surrogate for both low and middle income countries. Moreover, overall number of countries was also low and these four countries may not represent their corresponding groups appropriately. Also the data does not specify the MNEs, rather the data is aggregated for a country. Future studies based on firm-levels can be done to see if the wages of an MNE across different countries is distinct.

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Secondly, out of governance-group variables, only political stability was included due to high collinearity between others. This may not show the whole strength of governance.

Further study can expand this analysis by incorporating more indicators by solving the problem of collinearity.

Thirdly, collinearity, which is ever present as a problem in linear regression, is the concerned issue. Collinearity exists whenever two or more independent variables are highly correlated. To visualize what collinearity represents, we can model a regression problem as a picket fence, where each picket represents an independent variable and collinearity will exist when the pickets overlap (Mason, 1987). In such a situation the overlapping pickets make the role of some pickets redundant. In present research, we have three of the independent variables that appear to be somewhat correlated. The labor regulation and political stability variables have something in common and therefore multicollinearity diagnostics is necessary in running multiple regression analysis.

Fourthly, Variance Inflation Factor (VIF) measures the extent of multicollinearity and VIF less than 10 ensures that multicollinearity is not too significant. The only indicator which goes below 10 VIF is political stability and hence it is chosen for this analysis. It should be noted that in Kaufmann and Kraay (2002), regulatory quality as one of the six governance indicators was also initially selected as an independent variable, however later was abandoned due to high multicollinearity with political stability.

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7. CONCLUSION

This thesis analyses the relationship of the governance and work sector with the wages of the multinational enterprises. It also includes the analysis of the labor laws and regulations on this relationship. Previous studies have shown relationships between governance and the MNE wages, (Kaufmann et al., 1999; Kaufmann & Kraay, 2002, Bom, R. 2015). All these studies have analyzed the political stability with the MNE wages, while this thesis analysis the economical conditions of the host as well as the home countries for the MNE wages with reference to the governance and the work sector. The labor regulations are also measured for influence on these relationships.

The problem of analysis of the multinational wages as being affected by the governance and the job sector is has been resolved by a linear regression problem solving technique. Labor regulations play a vital role in manipulating the wages in multinational firms. This research has taken labor regulation as a binary variable and has laid down important analysis and deductions in its effect on the wages of multinational firms and also related it to the political stability.

Although this is a more comprehensive result on the factors influencing wage in comparison to the previous researches in the literature, it still could be developed to consider job conditions and other circumstances in specific industries. For example the difficulty of a mining job, which is not comparable to a computer programming position in an office, should lead to different results. Furthermore, we didn’t consider extent of labor regulation, and just supposed it is a binary variable. Further researches could be dedicated to assume an ordinal variable for labor regulation.

The hypotheses are tested with a multiple regression analysis and it shows that multinational wages is significantly explained by governance and work sector under the influence of the labor regulations. This important role of the governance on multinational wages is in line with previous studies (Kaufmann et al., 1999; Kaufmann & Kraay, 2002). In fact, the estimated coefficients show that an improvement in political stability and regulatory quality raises MNE wages significantly.

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to the existing literature on how governance affects multinational wages and by investigating the moderating role of labor regulation. Existing literature suggests that good governance leads to better economic development. The results of this thesis support these findings in the specific context of multinational wages with relevance to the work sector conditions in home and host countries.

This study has been done by analyzing the multinational wages as being a dependent variable. It can be extended by considering other variables like working hours, etc. as dependent variables and then carry out the same study.

In addition to this, the work sector has been taken as a single entity and is observed against rest of the variables. If work sector is divided further based on the type of the jobs and their technical involvements, this study can give in depth analysis for different sectors of the economical world. Expanding the study by exploring the variables in depth can give a better estimation of the relationships between the major factors effecting the wages of the multinational enterprises.

This will give a more complete view on labour conditions. Also, the results of this thesis show that labor regulations have a significant effect on multinational wages and their relationship with the governance and work sector.. The specific aspect of labour laws and regulations should get more attention in future research. This study could be expanded by analysing the specific aspects related to laws pertaining specifically to MNEs.. What are these aspects, is there a difference between them, and how do they affect MNE wages separately? Finally, a differentiation of the work sector can provide an in depth analysis.

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ACKNOWLEDGEMENT

I would like to thank my thesis supervisor Dr Ilir Haxhifor the detailed feedback and guidance during my master thesis.

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