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Keywords:

  • Multinational firms;
  • technology transfer;
  • wages

We construct an oligopoly model in which a multinational firm has a superior technology compared to local firms. Workers employed by the multinational acquire knowledge of its superior technology. The multinational may pay a wage premium to prevent local firms from hiring its workers and thus gaining access to their knowledge. In this setting, the host government has an incentive to attract FDI due to technology transfer to local firms or the wage premium earned by employees of the multinational firm. However, when FDI is particularly attractive to the multinational firm, the host government has an incentive to discourage FDI.

JEL classification: F13; F23; J41; L13; O14; O33; O38