Employment dynamics in foreign and domestic plants: Evidence from Irish manufacturing

International Review of Applied Economics,Vol. 19, No. 2, 163–178, April 2005

ISSN 0269-2171 print; ISSN 1465-3486 online/05/020163-16 © 2005 Taylor & Francis Group LtdDOI: 10.1080/02692170500031349

Employment Dynamics in Foreign and Domestic Plants: Evidence from Irish Manufacturing

HOLGER GÖRG* & ERIC STROBL**

*University of Nottingham, UK and DIW Berlin, Germany; **THEMA, Université de Paris X-Nanterre and CORE, Université Catholique de Louvain, FranceTaylor and Francis LtdCIRA103117.sgm10.1080/02692170500031349International Review of Applied Economics0269-2171 (print)/1465-3486 (online)Original Article2005Taylor & Francis Ltd192000000March 2005EricStroblCOREUniversite Catholique de LouvainVoie du Roman Pays 34B-1348 [email protected].

ABSTRACT In this paper we investigate the driving factors behind the diverse employ-ment performances of indigenous and foreign-owned (multinational) plants in Ireland.Examining aggregate job creation and job destruction rates we find that the net gain of theforeign sector in Irish manufacturing employment was due to a considerably lower rate ofjob destruction and a slightly higher job creation rate. An econometric investigation intothe determinants of net employment growth at the plant level lends further credence to theargument that foreign plants performed better than domestic plants. Even after controllingfor a number of plant and sector specific effects, multinationals experienced greater netemployment growth rates than their indigenous counterparts.

KEY WORDS: Employment adjustment; job flows; multinational companies

JEL CLASSIFICATION: F23, L60, J63

Introduction

The recent economic growth performance of the Irish economy has stimulated anumber of studies analysing this issue (for example, Görg & Ruane, 2000; Barry,1999; Gray, 1997). Data available from the OECD (1998), for example, show thatIreland’s average annual growth rate of real GDP of 7.4% between 1992 and 1998outstripped not only the growth rate of the European Union (EU) (1.9) but alsothat of the buoyant US economy (3.1) over the same period. Ireland’s economicgrowth has also been reflected in terms of employment. Figure 1 shows thatmanufacturing employment in Ireland decreased by only about 3% between 1973(the year that saw Ireland’s accession to the then European Community) and 1996,whereas employment in the same sector in the UK and the Rest of the EU (REU)decreased by 44% and 20%, respectively.1 Again, the Irish performance evenoutdid that of the USA, where there was a decrease of approximately 8% between1973 and 1996.Figure 1. Comparison of employment growth. Source: derived from OECD Employment Outlook.The Irish growth experience is arguably, at least to some extent, due to indus-trial policies aimed at attracting foreign direct investment and the location of

Correspondence Address: Eric Strobl, CORE, Université Catholique de Louvain, Voie du Roman Pays 34,B-1348 Louvain-la-Neuve, Belgium. Email: [email protected]

164 H. Görg & E. Strobl

multinational companies in the Irish economy (e.g. Sachs, 1997). As Ruane & Görg(1999) discuss, such policies include low corporate tax rates as well as the avail-ability of investment grants which are administered by the Industrial Develop-ment Authority. Ruane and Görg also point out that, traditionally, the mainobjective of these policies was to attract the location of multinationals in order tocreate additional employment in the manufacturing sector of the economy.

This policy approach is to some extent reflected in the development of employ-ment numbers in foreign compared to indigenous firms in Ireland. Foreign sectoremployment grew by approximately 30% between 1973 and 1996, while thecomparable figure for the indigenous sector is a fall of 20%—a figure much moresimilar to the employment performance in the EU overall.2 It is also notable thatforeign firms increased their employment share steadily over our sample period,from 33% in 1973 to 45% in 1996. If lessons are to be learnt from the Irish growthexperience, it thus seems fruitful to identify and contrast the employment experi-ence of foreign and domestic firms in greater detail.

The factors underlying these contrasting employment trends are the focus of thepresent paper. We attempt to shed light on the diverse employment experiences ofthe two nationality groups in Irish manufacturing by investigating whether thereare significant differences in the employment adjustment process between foreignand indigenous firms. We do so by analysing a plant level employment data set thatincludes virtually all indigenous and foreign firms that have operated in the Irishmanufacturing sector since 1973. We apply the techniques developed by Davis &Haltiwanger (1992) to characterize employment adjustments at the aggregate andsectoral level over time and compare these for indigenous and foreign plants.3 More-over, we disentangle the role of nationality of ownership from other plant specificfactors for plant employment growth over our sample period at the micro-level.

Figure 1. Comparison of employment growth

Irish Manufacturing 165

This paper is organized as follows. The next section presents the data source andsome summary statistics to describe the data. In the third section we calculate andanalyse job flow measures by nationality of ownership at the aggregate andsectoral level, while in the penultimate section we examine the determinants of netemployment growth at the plant level for indigenous and foreign plants. Finally,we present a summary and conclusions.

Data Source and Descriptive Statistics

To examine the employment adjustment process we use data available from theannual employment panel survey carried out since 1973 by Forfás, the governmentagency with responsibility for industrial development in Ireland. The unit ofobservation is the individual plant and Forfás claims that the survey covers virtu-ally all known active manufacturing plants, i.e. even small production units withone or two employees.4 The response rate to the survey is usually high, beinggenerally over 99% with no size restriction. Such a high response rate is not theleast due to the fact that many firms are in receipt of subsidies or other forms ofadministrative or technical assistance from the government agency and havetherefore an incentive to respond to the survey.

The data are available to us for the period 1973–1996. For each plant, the numberof permanent full-time and other non-standard (part-time and temporary) employ-ees is reported. Permanent full-time employees are defined as those who work formore than 25 hours a week and are employed on a continuous basis. In measuringemployment at the plant level to arrive at aggregate job flows we only considerpermanent full-time employees since the information on other non-standardemployment is only available since 1990 and is generally not considered as reliable.5

Each plant is, amongst other things, identified by a unique plant number, theyear of start-up, nationality of ownership and its 4- to 5-digit NACE code sector. Aplant is classified as being foreign-owned if 50% or more of its shares are held byforeign owners. The plant identifiers are only changed if there is an actual changeof ownership. This means that we cannot distinguish between new plant identifi-ers due to births and deaths, and changes in plant identifiers due to takeovers.While this may create some problems in terms of overstating the aggregate flowsresulting from plant births and deaths, we suspect that, as a whole, takeoverswould result in only negligible measurement errors in our calculations as mostforeign direct investment in Ireland has been in the form of greenfield investment,i.e. the setting up of entirely new plants, rather than takeovers of existing firms(Barry & Bradley, 1997).6

Tables 1 and 2 provide a few summary measures of the indigenous and foreignsub-sectors of Irish manufacturing, respectively, for the years 1973 and 1996 asderived from our data. Comparing the statistics for the two sub-groups acrosstables, the foreign multinational sector has steadily increased its share of totalmanufacturing employment from 33 to 45%. Although the number of foreignplants in Irish manufacturing is and has been substantially less than the number ofdomestic plants, their size, in terms of both average and median size, is consider-ably larger. Moreover, while the average and median size of indigenous plants hasfallen over time, that of foreign plants has risen. One should also note that therewas a notable average age difference at the start of our sample period betweenindigenous and foreign plants, but that this has now largely disappeared, if notbeen slightly reversed.


We also provide summary statistics distinguishing between survivors (plantsexisted both in 1973 and 1996), exits (plants that existed in 1973 but no longer in1996) and entrants (plants that did not exist in 1973, but had positive employmentin 1996); these also are provided in Tables 1 and 2. As can be seen, survivingdomestic plants increased their share of total domestic employment over oursample period, while surviving foreign plants experienced some (relative to totalforeign employment) losses over time. Furthermore, surviving foreign plants areon average about five years younger than their domestic counterparts, and thisdifference has remained relatively stable over time.

Our data on exiting plants suggest that these have been important for both thedomestic and foreign sector—more than half of total employment in 1973 had beenlost by plant exits for both sectors. The other statistics on the exiting plants suggestfurthermore that for both sectors these tended to be on average younger andsmaller relative to those that survived our sample period.

For those plants that entered the manufacturing sector some time after 1973 andstill existed in 1996 we find that these, at least by 1996, were smaller, in terms oftheir average and median size, than their survivor counterparts. This effect isparticularly apparent for domestic entrants, where the average size of an entrantis 63% less than those plants that survived over our sample period.

We also calculated similar tables as above breaking down our sample into high-and low-technology plants. One finds that surviving plants in both high- and low-tech sectors have lost some of their share of total employment by the end of our

Table 1. Descriptive statistics of domestic plants

Survivors Exits Entrants Overall

1973 1996 1973 1996 1973 1996

Employment 68374 57033 82437 63695 150811 120728No. of plants 1482 1482 2644 4358 4126 5830Age (years) 23.2 45.2 19.6 9.9 21.0 18.9Share of employment (%) 45.3 47.2 54.7 52.8 100.0 100.0Mean No. of employees 46 38 31 14 37 21Median No. of employees 15 15 10 5 12 7

Source: Own calculations based on Forfás Employment Survey data.

Table 2. Descriptive statistics of foreign plants


1973 1996 1973 1996 1973 1996

Employment 37079 33487 37522 64072 74601 97559No. of plants 244 244 432 593 676 837Age (years) 18 40 13.8 11.3 15.5 19.8Share of employment (%) 49.7 34.3 51.3 65.7 100.0 100.0Mean No. of employees 153 137 87 108 111 117Median No. of employees 65 78 31 43 41 53



sample period. In terms of age and there are some noteable differences across thesetwo categories, however, and in particular, high-tech plants tend to be younger forsurvivors, entrants and exits. Moreover, while entrants in the high-tech sector arelarger in terms of mean size, survivors, at least initially were somewhat smaller.One should note, however, that the somewhat different patterns in terms of themedian size suggests that it may be important to take the whole size distributioninto consideration before firmly concluding anything in terms of size discrepancies.

Aggregate and Sectoral Job Flows

A priori one may postulate nationality of ownership to be an important factor in aplant’s employment adjustment behaviour if, as is commonly argued, foreignmultinational companies have access to higher levels of technology than indige-nous firms, reflecting firm-specific assets (see Markusen, 1995). Caballero &Hammour (1994) show in their model that firms with high rates of innovationsshould be expected to create (relatively) more and destroy (relatively) fewer jobsthan other firms. If foreign multinationals use higher technology they may beexpected to have higher rates of innovation than indigenous firms and thus, aspredicted by Caballero & Hammour (1994) have higher (lower) rates of jobcreation (destruction).7

Higher technology use in production is also likely to require labour with rela-tively greater level of skill. Hence, according to human capital theory, job match-ing will typically involve a more equitable sharing of the returns to human capitalbetween the employer and employee and more durable employment relation-ships, i.e. again suggesting lower job destruction rates (see, for instance, Parsons,1986).8

In order to derive an aggregate and inter-temporal picture and take account ofall the plant level employment adjustments standard recent practice, as pioneeredby Davis & Haltiwanger (1992), has been to aggregate employment growth ratesat the micro level into separate aggregate indices of job creation and job destruc-tion. We similarly construct the aggregate job flows for the Irish manufacturingsector in the spirit of Davis & Haltiwanger (1992). The formulae used are set out inthe Appendix.

The aggregate job creation, job destruction and net growth rate for the indige-nous and foreign sub-sectors are reported in Tables 3 and 4, respectively. Accord-ingly, the job flows induced an average net negative growth of the indigenous, butnet positive growth of the foreign sector, as already discussed above. This wasprimarily driven by a slightly higher average job creation and a lower average jobdestruction rate in the foreign sector. The magnitude of job creation and jobdestruction is high for both nationality groups over the entire period, indicating ahigh degree of plant adjustment heterogeneity within the foreign and indigenoussectors. It also shows that a large amount of information is lost in just examiningnet aggregate figures. On average the job creation rate was 8.8% and 9.7% for theindigenous and foreign sectors, while the job destruction rates were 9.6% and7.8%, respectively, over our sample period.9 Under the assumption of stable jobcreation and job destruction rates, the job destruction figures suggest that on aver-age a job lasts 2.4 years longer in foreign multinationals.

The summary statistics given in Tables 1 and 2 showed that entering and exitingplants played an important role in the changing employment structure of Irishmanufacturing. Shown in the Tables 3 and 4 are the birth and death rates of the


domestic and foreign sectors, calculated respectively as the number of births anddeaths relative to the total number of plants in a given year. The figures indicatethat on average the incidence of plant birth and death are marginally higher in theindigenous sector. Specifically, from a given population about 7.2% are newlyborn plants whereas about 5.7% of all plants die in a given year. The correspondingfigures for the foreign sector are 6.3 and 5.1% respectively.

The plant turnover just described plays an important role in total job gains andjob losses for both sectors. As shown in Tables 3 and 4, in the indigenous sector onaverage 27.1% of job gains are due to new plants starting up, whereas on averageslightly over a third of all jobs lost in any year are due to plants closing down.Although the birth rate of the foreign sector is only marginally lower than that inthe indigenous sector, plant births play a substantially smaller role in jobcreation—on average only about 18.1%. This suggests that expansion of continu-ing plants is a more important determinant of job creation in the foreign than in theindigenous sector. The importance of job losses due to plant shut down is, as is thedeath rate, slightly lower in the foreign than in the indigenous sector.

In Table 5 we also report the average job flow measures for 10 manufacturingsectors for the indigenous and foreign nationality groups.10 As can be seen, thereare considerable differences between the indigenous and foreign sub-sectorswithin our broad NACE sector breakdown. Particularly noticeable are the largenet gains in the Chemicals and Metals & Engineering sectors by the foreign, andlarge net losses of the more traditional sectors of Drink and Tobacco, Clothing,Footwear and Leather, and Textiles by the indigenous sector. Since at least somesub-sectors in Chemicals and Metals & Engineering may be regarded as high tech-nology, this result appears in line with our theoretical priors as pointed out above,namely that plants in high-technology industries should have higher job creationand lower job destruction rates than plants using lower technology.

Plant Level Employment Growth Rate

Our analyses at the aggregate and sectoral level suggest that the net aggregateemployment gain by multinationals in Irish manufacturing was mainly due to alower job destruction rate. One has to keep in mind, however, that although jobflow rates are more informative than simple net aggregate trends they are stillaggregating over potentially heterogenous sets of firms.11 As Tables 1 and 2revealed, there are considerable differences in the characteristics of foreign and

Table 3a. Descriptive statistics of high-tech sector plants


1973 1996 1973 1996 1973 1996

Employment 11842 10002 11175 13254 23017 43256No. of plants 126 126 220 289 535 837Age (years) 19 41 14 9 16 12Share of employment (%) 48.0 34.2 52.0 65.8 100 100Mean No. of employees 76 84 48 62 58.7 61.3Median No. of employees 23 34 13 10 15 15



indigenous plants in terms of size and age. Thus, to conclude that apparent differ-ences in employment adjustment between foreign and indigenous plants are duethe nationality of ownership, rather than some other plant specific characteristic,such as size or age, further investigation at the level of the individual plant isrequired.

Table 3b. Indigenous job flow rates

POS NEG NET Birth rate Death rate% Gains due

to births% Losses due

to deaths

1974 6.4 7.0 −0.6 4.6 2.5 19.3 18.71975 5.6 10.1 −4.5 4.6 3.2 20.7 14.91976 8.2 8.0 0.2 5.8 3.0 25.7 261977 7.8 6.8 1.0 7.3 2.9 28.0 33.91978 8.0 5.7 2.3 8.4 3 24.5 42.01979 9.1 6.5 2.6 8.9 2.5 29.8 31.71980 7.2 12.0 −4.8 8.4 3.2 31.8 26.81981 7.9 9.4 −1.5 8.6 3.8 26.8 32.41982 6.9 10.9 −4.1 6.8 4.3 29.6 30.51983 7.4 13.0 −5.6 8.9 5.1 29.9 34.31984 9.6 11.0 −1.4 12.7 5.7 48.3 40.41985 8.3 10.9 −2.6 10 6.7 32.5 43.31986 8.7 11.8 −3.1 9.3 8.4 34.1 40.51987 9.1 12.3 −3.2 8.3 7.0 33.3 39.01988 10.6 10.4 0.2 8.2 7.4 27.8 38.91989 11.0 9.6 1.4 5.8 6.5 21.7 37.71990 10.6 9.9 0.7 5.4 12.8 20.6 49.31991 9.5 9.7 −0.2 6 7.3 22.1 36.71992 9.4 8.9 0.4 5.3 6.2 31.0 29.41993 9.2 10.4 −1.2 6.7 9.8 28.5 40.01994 9.6 8.2 1.4 5.3 5.8 17.7 24.31995 11.3 7.6 3.7 7.0 7.1 25.2 37.31996 10.2 10.1 0.1 3.7 6.7 15.4 30.4Average 8.8 9.6 −0.8 7.2 5.7 27.1 33.8Maximum

11.3 13.0 3.7 12.7 12.8 48.3 49.3

Minimum 5.6 5.7 −5.6 3.7 2.5 15.4 14.9

Source: own calculations based on Forfás Employment Survey data

Table 4a. Descriptive statistics of low-tech sector plants


1973 1996 1973 1996 1973 1996

Employment 125063 82557 77162 88874 202225 171431No. of plants 1276 1276 2991 4551 4267 5827Age (years) 24 43 17 10 20 24Share of employment (%) 46.0 30.1 64.0 69.9 88.4 70.8Mean No. of employees 89 83 45 52 47.4 29.4Median No. of employees 21 24 12 12 14 9



In order to disentangle the role of nationality of ownership from other plantspecific characteristics that determine employment adjustments we postulate thefollowing employment growth equation for plants:

where NET is the growth rate as defined in (A1), OWN is a zero-one type dummytaking the value of one if the plant is foreign and zero otherwise, SIZE is plant sizemeasured in terms of employment, AGE is measured as years since start-up date,NEU is a zero-one type dummy indicating whether the plant existed prior toIreland’s entry into the European Union in 1973, and NETS is the net sectoralgrowth rate defined for 68 sub-sectors. Furthermore, δ are sector specific timedummies, λ are year specific effects modelled as time dummies, and ε is an errorterm, the properties of which are discussed below.

We include plant size in our equation since, as has already been shown, foreignplants in Ireland are generally much larger than indigenous ones. There has beenmuch debate on the growth rates of small relative to large firms, see for instance

NET OWN SIZE SIZE AGE AGE

NEU NETSit it it it it it

it jt j t it

+ = + + + + ++ + + + +

1 1 2 3 42

5 62

7 8 1

β β β β β ββ β δ λ ε

L

L ( )

Table 4b. Foreign job flow rates

POS NEG NET Birth rate Death rate% Gains due

to births% Losses due

to deaths

1974 8.7 7.7 0.9 11.3 2.9 29.7 29.01975 8.8 10.8 −2.0 7.2 5.8 28.5 13.91976 12.2 6.9 5.3 8.3 4.9 23.7 27.31977 13.7 8.2 5.5 8.0 6.3 23.6 44.21978 11.1 6.2 4.9 9.8 5.4 20.7 38.41979 11.9 5.1 6.8 6.7 3.9 14.8 19.21980 8.8 8.4 0.4 9.8 3.7 21.4 22.51981 8.3 9.9 −1.6 9.6 6.4 20.5 41.31982 7.6 8.3 −0.7 4.6 4.5 15.7 19.91983 8.3 12.4 −4.1 5.9 6.8 19.5 36.91984 8.9 11.0 −2.0 9.2 7.1 34.1 42.71985 8.2 10.4 −2.2 7.2 7.0 23 43.71986 8.0 7.7 0.3 6.1 6.4 13.7 34.41987 7.6 8.1 −0.5 5.5 5.5 13 37.11988 9.4 5.4 4.0 5 4.8 13.8 33.81989 9.7 4.8 4.9 3.7 5.1 11.8 33.81990 9.5 7.0 2.5 3.8 5.6 13.7 40.91991 8.5 7.4 1.1 4.4 5.1 19.5 25.91992 8.3 8.3 0.0 5.4 5.5 17.2 36.81993 9.2 6.8 2.4 3.9 3.8 6.1 19.81994 11.1 5.9 5.2 4.4 3.6 18.2 19.61995 12.1 5.7 6.4 3.4 2.6 8.0 15.01996 12.6 7.6 4.9 3.1 4.0 6.1 24.9Average 9.7 7.8 1.8 6.3 5.1 18.1 30.5Maximum 13.7 12.4 6.8 3.1 2.6 6.1 13.9Minimum 7.6 4.8 −4.1 11.3 7.1 34.1 44.2



Sutton (1997). Although this discussion is far from conclusive, it does cast consid-erable doubt on whether small plants can be considered identical in behaviour tolarge plants. Thus to truly disentangle the effect of ownership one should controlfor plant size.12 We have also included plant size squared to allow for a non-linearrelationship between plant employment growth and its size.

Plant age is included in order to take account of the fact that the employmentadjustment process may also alter as plants move through their life cycle (Daviset al., 1996). Age itself, regardless of start-up period, may influence the growth rate(see, for instance, Dunne & Hughes, 1994; Dunne et al., 1989; Evans, 1987). On theone hand, plants may take some time before they reach their optimal size; on theother hand, long established incumbents may have absolute cost advantages vis-à-vis newer plants. Similarly as for size we have included age squared to allow forthe possibility of non-linear relationships.

We have also included a dummy, NEU, taking on the value of one when a plantexisted prior to Ireland’s entry into the EU. Prior to EU entry many firms, bothforeign and indigenous, still enjoyed some degree of protectionism from foreigncompetition. Walsh & Whelan (2000) argue that many of these firms, especially ifthey were not export oriented, were inefficient and unable to cope with interna-tional competition once Ireland entered a free trade regime within the EU in 1973.13

We would, thus, expect such plants to have lower employment growth rates thanplants that set up after Ireland’s entry into the EU. Finally, equation (1) includesthe net sectoral growth rate to control for sectoral and time dummies to takeaccount of sample effects and aggregate economic conditions.

We estimate equation (1) using two different specifications based on differentassumptions about the error term εit. First, we assume that the error term consistsof two components, εit = ui + eit with ui being a time invariant plant specific effectand eit being the remaining error term assumed to be independent across plantsand time. Assuming that ui is random and uncorrelated with the regressorsallows us to obtain estimates for the time invariant ownership dummy variableby using random effects estimation (see Baltagi, 1995). In a second specificationwe assume that, rather than there being a time-invariant plant specific effect forthe whole period, there is a constant AR(1) autocorrelation within plants. Such

Table 5. Average sectoral job flow rates

Indigenous Foreign

POS NEG NET POS NEG NET

1. Non-metallic minerals 5.27 7.05 −1.78 4.73 7.65 −2.922. Chemicals 7.17 7.95 −0.78 8.36 4.61 3.753. Metals and engineering 10.80 10.20 0.60 10.90 7.72 3.184. Food 7.07 7.78 −0.70 5.96 6.86 −0.905. Drink and tobacco 4.56 7.63 −3.07 2.44 5.10 −2.666. Clothing, footwear and leather 8.28 13.20 −4.92 7.04 8.17 −1.127. Textiles 8.62 12.78 −4.16 9.95 13.69 −3.748. Furniture and timber 9.82 10.03 −0.20 10.16 10.07 0.099. Paper and printing 4.92 5.51 −0.59 6.91 7.84 −0.9310. Miscellaneous 10.27 9.13 1.14 9.71 8.76 0.94



serial correlation should be evident if plant’s year-on-year growth rates are notindependent over time. We estimate this specification allowing for autocorrelatederror terms within panels using OLS with panel-corrected standard errors (seeBeck & Katz, 1995).14

We reduce our sample to observations from continuing plants, as in Hart &Oulton (1996). Thus, we implicitly assume that plant exit is a random process if ourestimates are not to suffer from sample selection bias.15 Our results for estimatingthe three different specifications of equation (1) are provided in the first column ofTable 6. Note that the results, in terms of magnitude and level of statistical signif-icance are very similar for the two specifications.

In terms of the explanatory variables we first find that the net sectoral growthrate, as would be expected, is positively related to a plant’s net employmentgrowth rate—if a plant is located in a sector that is experiencing economic growthit is likely to grow also. We also discover that larger plants experience lower ratesof net employment growth. This relationship however takes a convex form, indi-cating that this effect occurs at a diminishing rate. Similarly, older plants are lesslikely to experience higher growth rates than younger plants. Again, this effectoccurs at a diminishing rate. These results on the effect of size and age on netemployment growth are consistent with the results on firm growth in the indus-trial organization literature, see, for example, Evans (1987). In terms of the EUdummy, our results suggest that plants that started up under the old protectionistregime grow less than plants that entered the Irish manufacturing sector after EUentry, a finding in line with Walsh & Whelan (2000).

Most interesting from our point of view is the finding that foreign plants expe-rience greater net employment growth than their domestic counterparts, even aftercontrolling for differences in plant size and age and for aggregate and sectoraleconomic conditions. This suggests that the net aggregate employment gain offoreign plants over our sample period evident in the aggregate figures was not justdue to differences in the distribution of plant characteristics and sectoral activitybetween indigenous and foreign plants.

We also interacted the ownership dummy with the size, age, and EU dummyvariables, thus investigating whether there are also slope differences betweenindigenous and foreign plants. As can be seen, the size effect is less strong forforeign plants, as the positive sign on the interaction term indicates. This impliesthat size acts to reduce employment growth by less if the plant is foreign, or, inother words, size matters less for employment growth in foreign plants than fordomestic plants. One should also note that the size effect diminishes at a lesser ratefor foreign plants, as the coefficient on the interaction term with size squared indi-cates. Examining the age interaction terms, we discover that the age effect, namelyolder plants experiencing less net growth, is larger for foreign plants, although thiseffect diminishes more for foreign plants.

Similarly, in terms of the EU dummy variable, we find that although indigenousplants also are less likely to grow if they existed prior to Ireland’s accession to theEU, for foreign plants this effect is larger. A possible explanation for this might bethat much of the foreign activity in Ireland prior to EU entry was due to UK firmsin ‘traditional’ (i.e. low tech) manufacturing sectors such as food, drink andtobacco, or clothing, footwear and leather. These firms thrived under Ireland’sspecial tariff arrangements with the UK, but were unable to cope with the increasein competition after the dismantlement of these in 1973 (see Ruane & Görg, 1999;Walsh & Whelan, 2000).


As noted earlier, foreign firms are generally argued to have access to higherlevels of technology than indigenous firms, reflecting the possession of firm-specific assets. Clearly, one should expect the difference in use of technologybetween indigenous and foreign firms to be greater in those sectors in which theuse of technology is more important. In order to investigate whether technologicalintensity is important in contrasting indigenous and foreign employment growthwe divided our sample into plants operating in low and high technology sectors.16

The results of estimating the two specifications of equation (1) for these two sub-samples are given in Table 7. Again, there are no major differences across the twospecifications for the two sub-groups.

We can note that both the size and age effect (i.e. older and larger plants havelower employment growth) work in the same direction for the two sub-samples,although the sizes of the coefficients appear to be larger in technology intensivesectors. In contrast to plants operating in low technology sectors, whether plantsbegan operating before or after EU entry does not affect the employment growthrate in the more technology intensive sectors. Most importantly, we find that, as

Table 6. Determinants of net employment growth

(1) (2)

SIZE −0.001(0.000)***

−2.2e–04(2.2e–05)***

SIZE2 6.0e–07(3.3e–08)***

1.5e–07(2.0e–08)***

AGE −0.004(0.001)***

−0.003(0.001)***

AGE2 4.4e–05(2.9e–06)***

3.2e–05(2.0e–06)***

NEU −0.010(0.006)*

−0.015(0.003)***

OWN 0.144(0.007)***

0.101(0.005)***

SIZE*OWN 3.1e–04(0.5e–04)***

5.2e–05(3.2e–05)

SIZE2*OWN −3.2e–07(3.9e–08)***

−6.0e–08(2.6e–08)**

AGE*OWN −0.008(0.001)***

−0.005(0.001)***

AGE2*OWN 8.9e–05(8.2e–06)***

6.0e–05(5.7e–06)***

NEU*OWN −0.013(0.012)

−0.015(0.007)**

NETS 0.234(0.012)***

0.246(0.011)***

CON 0.086(0.005)***

0.059(0.005)***

No. Obs. 139242 139242F(H0: βTIME=0) 410.4*** 305.2***Wald χ2 4216.5*** 3747.5***R2 0.02

Notes: Standard errors in parentheses. *** significant at the 1% level, ** significant at the 5% level. (1)random effects estimation, (2) AR(1) autocorrelation


expected, the ownership effect appears to be larger in high technology sectors—foreign plants experience greater relative employment growth if they operate intechnology intensive industries.17

The interaction terms also unearth notable differences across the two samples.While the size and age effects are again working in the same direction for the twogroups, the coefficient on the EU dummy interaction term indicates that foreignplants in low tech industries which entered before 1973 experienced slowergrowth than domestic plants. No such relative effect is apparent for foreign plantsin high tech industries, however. This may again reflect the importance of UKfirms in low tech sectors, alluded to above.

Concluding Remarks

The Irish manufacturing sector has undoubtedly performed well compared toother developed countries in terms of employment and output growth over the

Table 7. Determinants of net employment growth for high- and low-tech plants

High Low

(1) (2) (3) (4)

SIZE −0.002(0.000)***

−4.0e–04(8.5e–05)***

−0.001(0.000)***

−2.1e–04(2.3e–05)***

SIZE2 8.1e–07(8.9e–08)***

2.7e–07(5.8e–08)***

5.9e–07(3.6e–08)***

1.4e–07(2.2e–08)***

AGE −0.008(0.001)***

−0.006(0.001)***

−0.004(0.001)***

−0.003(0.000)***

AGE2 8.1e–05(1.1e–05)***

6.0e–05(7.8e–06)***

4.1e–05(3.0e–06)***

2.9e–05(2.1e–06)***

NEU 0.022(0.020)

−0.002(0.010)

−0.014(0.006)**

−0.016(0.003)***

OWN 0.194(0.014)***

0.149(0.010)***

0.097(0.009)***

0.063(0.006)***

SIZE*OWN 6.2e–04(1.5e–04)***

1.5e–04(9.6e–05)

3.5e–046.0e–05)***

6.2e–05(3.7e–05)*

SIZE2*OWN −3.5e–07(1.1e–07)***

−1.1e–07(7.6e–08)

−3.6e–07(4.4e–08)***

−6.7e–08(2.9e–08)**

AGE*OWN −0.010(0.001)***

−0.010(0.001)***

−0.005(0.001)***

−0.002(0.001)***

AGE2*OWN 1.0e–04(1.8e–05)***

1.0e–04(1.3e–05)***

6.1e–05(9.6e–06)***

2.9e–05(6.7e–06)***

NEU*OWN 0.002(0.028)

0.022(0.014)

−0.018(0.014)

−0.030(0.008)***

NETS 0.310(0.035)***

0.309(0.034)***

0.214(0.013)***

0.221(0.012)***

CON 0.110(0.016)***

0.078(0.017)***

0.082(0.005)***

0.056(0.005)***

# Obs. 19739 19739 119503 119503F(H0: βTIME=0) 72.7*** 57.3*** 374.8*** 283.4***Wald χ2 1400.5*** 1118.3*** 2804.7*** 2442.7***R2 0.05 0.02

Notes: Standard errors in parentheses. ***Significant at the 1% level; **Significant at the 5% level. (1)+(3)random effects estimation, (2)+(4) AR(1) autocorrelation


last almost 30 years. While a closer look may allow one to attribute this to the influxand superior employment performance of multinational companies located inIreland, it also reveals that at the same time the indigenous sector experiencedconsiderable job losses, although not enough to offset the positive contributionsmade by multinationals. In this paper we investigate the driving factors behindthese diverse experiences of indigenous and foreign multinational firms by usinga comprehensive plant level employment panel data set that allows us to charac-terize their respective employment adjustments since the early 1970s.

Examining aggregate job creation and job destruction rates we find that the netgain of the foreign sector in Irish manufacturing employment was due to a consid-erably lower rate of job destruction and somewhat higher job creation rate. Interms of job creation foreign continuing plants appear to have played a moreimportant role than their indigenous counterparts. At the sectoral level we findthat job gains in the foreign sector were primarily due to their superior perfor-mance in modern industries, while high rates of job destruction in the domesticsector were more prevalent in the more traditional industries. This is consistentwith theories that postulate that firms that use greater technology and higherskilled labour, as multinationals are generally believed to, are characterized bygreater job stability.

An econometric investigation of the determinants of net employment growth atthe plant level lent further credence to the argument that foreign multinationalsperformed better than indigenous plants particularly in technology intensivesectors. Even after controlling for a number of plant and sector specific effects,multinationals experienced greater net employment growth rates than their indig-enous counterparts.

Given that, as Ruane & Görg (1999) point out, employment creation has been amajor objective of Irish industrial policy towards multinational companies, ouranalysis provides some evidence that this policy strategy seems to have bornefruits in terms of the employment performance in multinationals compared toindigenous firms. However, we are cautious to point out that on the basis of ouranalysis we cannot conclude that this policy strategy has been an unqualifiedsuccess; in order to make such a statement, we would also need to take intoaccount the costs of this policy, in particular in terms of grants and other invest-ment incentives paid to foreign companies. Such a task is beyond the scope of thepresent paper but clearly deserves further research.

Acknowledgement

The authors are grateful to Salvador Barrios and Katharine Wakelin for helpfulcomments on an earlier draft. All remaining errors are, of course, the authors’.Financial support through the Leverhulme Trust (Grant No. F114/BF) is gratefullyacknowledged.

Notes

1. The data for REU are calculated for the EU 12 less Ireland and the UK. Because of data unavailabil-ity, the Netherlands, Luxembourg and Portugal are also not included in REU.

2. See, however, O’Malley (1998) for a discussion of the ‘turnaround’ in the performance of indige-nous firms after the late 1980s and early 1990s.

3. There have been a number of studies on employment adjustment using plant level data in variouscountries. One of the main conclusions derived from these is that aggregate employment trends


mask considerable heterogeneous plant level adjustments consisting of simultaneous job creationand destruction even within narrowly defined sectors. See, for example, Konings (1995) for the UK,Konings et al. (1996) for Poland, Albæk & Sørensen (1998) for Denmark, Baldwin et al. (1998) for theUS and Canada, and Abowd et al. (1998) for France. Using plant level data similar to ours for theperiod 1973–1994, Strobl et al. (1996, 1998) show that the degree of heterogeneity in the Irish manu-facturing sector is not unlike that of other countries. None of the cited studies, however, comparethe relative contribution of foreign-owned and domestic firms to overall employment changes.

4. Other studies of job creation and destruction use mostly representative samples of the total popu-lation of plants (such as Baldwin et al., 1998; Albæk & Sørensen, 1998; Davis & Haltiwanger, 1992).In contrast, Konings (1995) used data covering almost exclusively large plants (average employ-ment size 4,530) and which did not cover births and deaths.

5. One should also note that firms recorded as having an employment level of one may be self-employed individuals or firms with a single employee. Unfortunately, the data does not allows usto distinguish between these two types.

6. This assumption may be wrong if a few large takeovers occurred which brought with themsubstantial employment effects. This could be particularly important for a small country likeIreland where changes owing to single, large employers can have a greater effect than for largernations. Unfortunately, with our database we have no way of determining whether this has indeedbeen the case during the period under analysis.

7. Some support for this assumption can be claimed from the analysis of research and development(R&D) activities in foreign plants in Ireland by Kearns & Ruane (2001). They show that, in 1993, 68%of total industrial R&D in Ireland was undertaken by foreign plants. Recall from our summarystatistics in Tables 1 and 2 that only a small fraction of plants (14% in 1996) are foreign-ownedunderlining the importance of R&D, i.e. innovative activity, in foreign multinationals.

8. On the other hand, as Audretsch (1991, 1995) argues, high technology (i.e. innovative) industriesare also highly competitive and firms can only survive and grow if they partake in the innovationprocess. Thus, given the uncertainty of innovation, high tech firms that are not able to innovatesuccessfully may have higher rates of job destruction as they may experience lower growth and possi-ble exit. This, however, may potentially be less of a problem for foreign multinationals as their posses-sion of firm-specific assets should give them better chances to survive and grow than domestic firms.

9. It is difficult to compare these figures with results for other countries due to different time periodsanalysed and different data definitions and availability. Using representative samples of plants,Albæk & Sørensen (1998) report rates of 12.0 and 11.5 for average job creation and job destructionrespectively in Denmark over the period 1980–1991, while Baldwin et al. (1998) find average jobcreation rates of 10.9 and 8.8 for Canada and the US and job destruction rates of 11.1 and 10.1 forthe two countries over the period 1973–1993.

10. The manufacturing sector was broken down into the Metals and Engineering, Chemicals, Non-Metallic Minerals, Food, Drink and Tobacco, Furniture and Timber, Clothing, Leather andFootwear, Paper and Printing, Textiles, and Miscellaneous.

11. For instance, Caballero (1992) demonstrates that when heterogeneities at the micro-level are suffi-ciently strong, the cross-sectional distribution can reverse the microeconomic asymmetries at moreaggregate levels.

12. Since the net growth rate is defined from t to t+1 we include size in time t as in, e.g. Konings et al.(1996).

13. In particular, these authors argue that although many of these firms managed to sustain themselvesfor a few years, they were unable to survive the deep recession of the 1980s.

14. Since the ownership dummy variable is time invariant, alternatively using of a fixed effects modelwould unfortunately not allows us to determine differential ownership effects in the employmentequation.

15. If this were not the case one could use Heckman sample selection techniques to estimate (1). Unfor-tunately these require an exclusion criteria, i.e. at least variable that can be used as an explanatoryin the selection equation but can a prior be justified to exclude from (1). Given the limited informa-tion available from our data set there is unfortunately no obvious candidate for this.

16. The classification of sectors into high tech and low tech is based on an OECD classification as usedby Kearns & Ruane (2001). Accordingly, high tech sectors are aerospace, computers and officemachinery, electronics and communications, pharmaceuticals, scientific instruments, electricalmachinery, motor vehicles, chemicals, non-electrical machinery.

17. Simple t-tests confirm that the coefficients are indeed different. The t-statistics are 5.9 and 7.4 for acomparison of the coefficients on OWN for the two specifications respectively.

18. Plants experiencing zero growth over a time interval do not add to the aggregate job flows.


19. Alternatively, the number of jobs created (destroyed) could have been summed and then dividedby the average size of the sector in question in order to obtain the aggregate job creation (destruc-tion) rate.

References

Abowd, J. M., Corbel, P. & Kramarz, F. (1998) The entry and exit of workers and the growth of employ-ment: an analysis of french establishments, Review of Economics and Statistics, 81, pp. 170–187.

Albæk, K. & Sørensen, B. E. (1998) Worker flows and job flows in danish manufacturing, 1980–91,Economic Journal, 108, pp. 1750–1771.

Audretsch, D. B. (1991) New-firm survival and the technological regime, Review of Economics and Statis-tics, 60, pp. 441–450.

Audretsch, D. B. (1995) Innovation and Industry Evolution (Cambridge, MA: MIT Press).Baldwin, J., Dunne, T. & Haltiwanger, J. (1998) A comparison of job creation and job destruction in

Canada and the United States, Review of Economics and Statistics, 80, pp. 347–357.Baltagi, B. H. (1995) Econometric Analysis of Panel Data (Chichester: Wiley).Barry, F. (Ed.) (1999) Understanding Ireland’s Economic Growth (London: Macmillan).Barry, F. & Bradley, J. (1997) FDI and trade: the Irish host-country experience, Economic Journal, 107,

pp. 1798–1811.Beck, N. & Katz, J. N. (1995) What do do (and not to do) with time-series cross-section data, American

Political Science Review, 89, pp. 634–647.Caballero, R. J. (1992) A fallacy of composition, American Economic Review, 82, pp. 1279–1292.Caballero, R. J. & Hammour, M. L. (1994) The cleansing effect of recessions, American Economic Review,

84, pp. 1350–1368.Davis, S. J. & Haltiwanger, J. (1992) Gross job creation, gross job destruction and job reallocation, Quar-

terly Journal of Economics, 107, pp. 819–864.Davis, S. J., Haltiwanger, J. C. & Schuh, S. (1996) Job Creation and Destruction (Cambridge, MA: MIT Press).Dunne, P. & Hughes, A. (1994) Age, size, growth and survival: UK companies in the 1980s, Journal of

Industrial Economics, 42, pp. 115–140.Dunne, T., Roberts, M. J. & Samuelson, L. (1989) The growth and failure of U.S. manufacturing plants,

Quarterly Journal of Economics, 103, pp. 671–698.Evans, D. S. (1987) The relationship between firm growth, size, and age: estimates for 100 manufactur-

ing industries, Journal of Industrial Economics, 35, pp. 567–581.Görg, H. & Ruane, F. (2000) European integration and peripherality: lessons from the Irish experience,

The World Economy, 23, pp. 405–421.Gray, A. W. (1997) International Perspectives on the Irish Economy (Dublin: Indecon).Hart, P. E. & Oulton, N. (1996) Growth and size of firms, Economic Journal, 106, pp. 1242–1252.Kearns, A. & Ruane, F. (2001) The tangible contribution of R&D spending by foreign-owned plants to

a host region: a plant level study of the Irish manufacturing sector (1980–1996), Research Policy, 30,pp. 227–244.

Konings, J. (1995) Job creation and job destruction in the UK manufacturing sector, Oxford Bulletin ofEconomics and Statistics, 57, pp. 5–24.

Konings, J., Lehmann, H. & Schaffer, M. E. (1996) Job creation and job destruction in a transition econ-omy: ownership, firm size, and gross job flows in Polish manufacturing 1988–91, Labour Economics,3, pp. 299–317.

Markusen, J. R. (1995) The boundaries of multinational enterprises and the theory of internationaltrade, Journal of Economic Perspectives, 9, pp. 169–189.

OECD (1998) OECD Economic Outlook, No. 64 (Paris, OECD).O’Malley, E. (1998) The revival of Irish indigenous industry 1987–1997, in: T. Baker, D. Duffy & F.

Shortall (Eds) Quarterly Economic Commentary: April 1998, pp. 35–78 (Dublin: Economic and SocialResearch Institute).

Parsons, D. O. (1986) The employment relationship: job attachment, work effort, and the nature ofcontracts, in: O. C. Ashenfelter & R. Layard (Eds) Handbook of Labor Economics, Vol. 2, pp. 789–848(New York: North Holland).

Ruane, F. & Görg, H. (1999) Irish FDI policy and investment from the EU, in: R. Barrell & N. Pain (Eds)Investment, Innovation and the Diffusion of Technology in Europe, pp. 44–67 (Cambridge: CambridgeUniversity Press).

Sachs, J. D. (1997) Ireland’s growth strategy: lessons for economic development, in: A. W. Gray (Ed.)International Perspectives on the Irish Economy, pp. 54–63 (Dublin: Indecon).


Strobl, E. A., Walsh, P. P. & Barry, F. (1996) The aggregate employment flows in Irish manufacturing,Trinity Economic Papers, Technical Paper No. 3. Trinity College, Dublin.

Strobl, E. A., Walsh, P. P. & Barry, F. (1998) Aggregate job creation, job destruction and job turnover inthe Irish manufacturing sector, Economic and Social Review, 29, pp. 55–71.

Sutton, J. (1997) Gibrat’s legacy, Journal of Economic Literature, 35, pp. 40–59.Walsh, P. P. & Whelan, C. (2000) The importance of structural change in industry for growth, Journal of

the Statistical and Social Inquiry Society of Ireland, 29, pp. 1–32.

Appendix

The aggregate job flows are calculated as follows (see Davis & Haltiwanger, 1992).A plant’s size at time t, xet, is defined as its average employment (n) between t–1and t:

The employment growth rate of a plant is calculated as follows:

where (A2) is symmetric about zero and lies in the closed interval [−2,2]. The leftendpoint corresponds to the growth rate of a plant that exits, while the right onecorresponds to a plant birth. The growth rate above is monotonically related to theconventional growth rate in that these two measures are approximately equal forvalues near zero.

To obtain the so-called aggregate job creation and job destruction rates for theindigenous and foreign sectors in Irish manufacturing in this manner the growthrate of each plant was computed, categorized as either positive or negative,18 size-weighted and then summed within this category:19

where Eit are the set of establishments within the foreign and indigenous sectors attime t, Xt is the (average) size of these sectors over the period t–1 to t, and POSt andNEGt are the job creation and job destruction rate, respectively. This leads to twofurther identities:

where NETt is the net employment growth of the manufacturing sector between t–1 and t.

xn n

etet et= + −1

21( )A

gn n

xetet et

t= − −1 2( )A

POSxX

g gtet

te Eet et

t

=

>∈∑ , ( )for A0 3

NEGxX

g gtet

te Eet et

t

=

<∈∑ , ( )for A0 4

NET POS NEGt t t= − ( )A5

Employment dynamics in foreign and domestic plants: Evidence from Irish manufacturing

Documents

Transcript of Employment dynamics in foreign and domestic plants: Evidence from Irish manufacturing