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

We study how foreign firms strategically adapt to their local environment and make hiring decisions in a host country with differing deep-seated cultural norms. Using unique employer-employee matched data of the private sector in Saudi Arabia, we find that foreign firms hire a larger share of Saudis and pay a firm premium of 9% for Saudis and 16% for non-Saudis. Our foreign firm premium estimates are robust to workers’ initial wage and firms’ country of origin, and persist even for foreign firms coming from countries with high Muslim share and low female labor force participation (FLFP). Female workers also receive a higher wage premium at foreign firms but are not hired more intensively compared to local firms, even for foreign firms coming from countries with greater FLFP. We propose a model in which foreign and domestic firms differ in their productivity levels and amenities offered to each type of worker. We find that amenities are important in understanding foreign firms’ wage setting and worker hiring decisions.