Globalization and Sustainability of Japan's Internal Labor Markets: Foreign Direct Investment (FDI) and Wages at Japanese Manufacturing Firms

Both inward and outward foreign direct investment (FDI) have implications for the wage rates of home-country workers. Such implications have been particularly noteworthy in Japan where the traditional internal labor-market practices, which value long-term sustainability of employment and wages, collide with the pressure for change in the globalizing Japanese economy on many fronts. In this paper we estimate the impacts of FDI on workers' wages in Japanese manufacturing industries. We find that Japanese employees benefit, in the form of wage gains, from their employers' association with both inward and outward FDI operations. These wage effects differ systematically depending on gender and worker ranks within their employer firms and are likely to weaken the mechanisms underlying the sustainability of Japanese firms' traditional internal labor markets. The presence of FDI effects on worker wages also implies an increasing disparity between the incomes of workers who work for successfully globalizing firms and workers who do not, jeopardizing Japan's traditional policy objective to sustain harmonious economic growth across all economic sectors. This would also deepen the structural divide including the wage gap of the Japanese economy that exists between large firms and small-and medium-size enterprises (SMEs) since firms which get involved in FDIs are mostly large firms.