Research / BFI Working PaperJul 28, 2023

Doing Business Far from Home: Multinational Firms and Labor Market Outcomes in Saudi Arabia

Alessandra González, Xianglong Kong

We study the labor market outcomes at foreign firms in a host country with differing deep-seated cultural norms. We analyze unique employer-employee matched data of the private sector in Saudi Arabia and find that, relative to domestic firms, foreign firms pay higher wages but hire a smaller share of Saudi and female workers. Moreover, the differences in worker shares between foreign and domestic firms cannot be fully rationalized by wage differentials. To better understand these findings, we develop a model of heterogeneous workers and firms and consider the role of productivity and amenities in determining wage and employment outcomes. We estimate a foreign wage premium ranging from 13% to 21% depending on worker demographics. In addition, we find that workers enjoy better amenities at foreign firms overall, with the exception of female workers. Workers at foreign firms coming from countries that are culturally close to the host country face lower wage premiums but higher amenities. We conclude that accounting jointly for productivity, amenities, and cultural norms is important in understanding the labor market outcomes of foreign firms in a setting in which home and host country cultural norms depart.

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