PUBLICATIONS & REPORTS

Contents Introduction

This paper examines the relationship between foreign ownership and earnings in Japan. We find that foreign-owned firms in Japan pay higher wages for their workers than domestic firms. Our results suggest that the differential human capital composition and industry sector distribution of the workers can explain some but not all the differences in earnings between workers in domestic versus foreign firms.

One possible explanation is that foreign firms must pay higher wages to compensate workers for the risk associated with relinquishing their employment security with the domestic firms. We find some evidence to this effect, mainly high turnover and a lack of trust between workers and their employers in foreign firms.

Our empirical analysis highlights the differences in the structure of earnings between foreign versus domestic firms. Domestic firms exhibit all features that are consistent with the stylized facts of the Japanese labor market, mainly the persistence of seniority, lifetime employment, and firm-size effects. These effects have no impact on earnings among workers in foreign firms.

The evidence presented here suggests that foreign firms import their human resource practices along with them when they enter the Japanese market. Although they represent only a fraction of the Japanese labor market, our exclusive focus on foreign firms has revealed a microcosm of U.S. and European human resource practices operating in Japan.