Foreign Investment in Hungary Widens Wage Gap, Favors Skilled Workers
Table of Contents
A new study reveals that while foreign direct investment (FDI) boosts technological growth in Hungary, it together exacerbates income inequality, notably between highly educated and manual laborers. The research, conducted by economists affiliated with the Hungarian Economic Association in collaboration with the Central European University (CEU), Stockholm University, and the World Bank, examines the impact of foreign ownership on Hungarian companies and their employees.
Hungary attracts over $1,000 billion in FDI annually, and the government allocates hundreds of billions of forints each year to incentivize foreign companies to invest. Though, questions remain about the effectiveness of these subsidies and their broader economic consequences. This study delves into how foreign investment reshapes company operations and, crucially, impacts employee compensation.
A Unique Approach to Measuring Impact
Researchers tackled a key methodological challenge: foreign investors don’t randomly select companies. They tend to acquire larger firms with already highly skilled, well-compensated workforces. Simply comparing foreign-owned and Hungarian-owned companies, therefore, wouldn’t isolate the effect of foreign ownership.
To overcome this, the team focused on companies that were Hungarian-owned in 2003 but transitioned to foreign ownership between 2003 and 2017. By comparing each company’s performance before and after acquisition, they could more accurately measure the impact of the change in ownership.
Did you know? – Hungary’s FDI inflows are significant, exceeding $1,000 billion annually. This makes it a key destination for foreign capital in central Europe.
Technological Upgrades Follow Foreign Acquisitions
The analysis revealed significant operational changes following foreign acquisitions. Companies experienced upgrades in procedures, machinery, and the types of products they manufactured, likely due to access to resources and expertise from their new parent companies. For example, the proportion of companies participating in innovation activities with other companies within the group rose from 4.4% before acquisition to 8.9% afterward. Similarly, the percentage of companies purchasing new machinery from abroad increased from 14.6% to 24.1% following the acquisition.
Notably, Hungarian companies began producing more expensive products after being acquired, indicating a shift towards higher-value production.
The Growing Divide in Compensation
Though, these advancements weren’t shared equally among all employees. The study found that wages increased more considerably for white-collar and office workers than for those in manual labor positions. “The appearance of a foreign owner resulted in a 5.2 percent increase in wages” for highly skilled office workers, researchers found. wage growth was even higher – exceeding 6 percent – for those with university degrees.
In contrast, wages for physical workers only increased by 2 percent. This disparity is further compounded by the fact that office employees generally earned more than manual laborers before the acquisition, meaning the technological advancements amplified existing wage inequalities within companies.
Pro tip: – When evaluating economic impacts, focusing on changes within the same entities-before and after an event-provides a more accurate assessment than comparing different entities.
Implications for the Hungarian Labor Market
The research confirms findings from international studies demonstrating that advanced technologies disproportionately benefit skilled workers. This presents a critical challenge for the Hungarian labor market. The study underscores the urgent need for proactive policies focused on workforce development.
Specifically, researchers emphasize the importance of strengthening retraining programs, expanding adult education opportunities, and prioritizing digital skills training. Investing in the e
Reader question: – Do you think government subsidies should be tied to demonstrable improvements in wages for all employees, not just skilled workers?
why: The study investigates the impact of foreign direct investment (FDI)
