Foreign takeovers boost wages of their British targets' workers

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Foreign takeovers of British companies boost the wages of workers at the target companies, according to research today that demolishes fears that overseas acquisitions are bad for the UK workforce.

But while pay rises as much as 13 per cent as a result of a US-driven deal, there is no gain when the successful bidders are from continental European Union countries.

The research, published today at the Royal Economic Society's annual conference, comes as BAA, the UK airports company, appears to be caught in a takeover tussle between a US company and a European business. Ferrovial of Spain and Goldman Sachs and GE have been linked to takeover bids

Two economists at Nottingham University, Holger Görg and Sourafel Girma, found that foreign takeovers of UK firms tended to boost wages for skilled and unskilled employees.

Their survey of 336 foreign acquisitions between 1980 and 1994, including 228 in the hi-tech electronics sector and the bulk in the low-tech food sector, found that wages of skilled workers rose by 2.6 per cent in the first year after the takeover. However, this was outstripped by a 7.5 per cent jump for the unskilled. "This finding suggests there is no evidence that foreign direct investment exacerbates income inequality, as unskilled wages appear to change by more than the average skilled wage," they said.

They discovered marked differences in workers' wages depending on the nationality of the predator. In the first two years after a US takeover, skilled workers see their earnings increase by 8 per cent.

Unskilled workers did even better as their pay went up by 13 per cent, the researchers found. However, they uncovered no similar effects for takeovers by multinationals from continental Europe. "In stark contrast, no evidence is found for any causal effect on wages, skilled or unskilled, following acquisition by EU based multinationals," they said.

Acquisition by multinationals from the rest of the world led to a rise in unskilled wages in the first two years - 4.4 per cent and 6.8 per cent - following the takeover.

The research is the latest to highlight benefits from foreign ownership of UK assets. A major research exercise by the National Institute of Economics and Social Research (NIESR) earlier this decade established that foreign-owned firms had a significant positive effect on the level of technical efficiency in domestic firms.

The researchers said a key issue was whether the takeover wage premium, in particular for US acquisitions, was desirable. They said that if the higher wage reflected the fact that the firm's assets were being better used, then it was a desirable outcome.

However, they warned that if wages rose because "better" workers were poached after the takeover, then there might be no net positive effect as rival firms would be left with a skills or labour shortage. "This is a tall order that needs to be tackled in future research," they said.