U.S. Multinationals and Competition from Low Wage Countries

It is often argued that the globalization of production places workers in industrialized countries in competition with their counterparts in low wage countries. We examine a firm-level panel of foreign manufacturing affiliates owned by U.S. multinationals between 1983 and 1992 and find evidence to the contrary. Affiliate activities in developing countries appear to be complementary to rather than substituting for affiliate activities in industrialized countries. Workers do compete across affiliates, but the competition is between affiliates in countries with similar workforce skill levels. The results suggest that multinationals with affiliates in countries at different stages of development decompose production across borders into complementary stages that differ by skill intensity. The implied complementarity of traded intermediate inputs has important implications for the empirical debate over trade, employment, and wages.