The impact of foreign direct investment on executive compensation: evidence from the Great Recession

ABSTRACT

This study examines the causal effect of outward foreign direct investment (FDI) on executive compensation using compensation data of 2,391 Japanese multinational enterprises (MNEs). A negative demand shock caused by the Great Recession in 2008 is applied to identify the impact of FDI on annual payments to corporate executives. We find that firms engaged in FDI tended to decrease executive compensation in response to the crisis to a greater degree than firms with no foreign investment. The result is consistent with the view that FDI activities may explain the recent increase in executive compensation.

KEYWORDS:

• Foreign direct investment
• inequality
• entrepreneurs
• natural experiment
• the Great Recession

JEL CLASSIFICATION:

• F23
• F16
• F12

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ (Bertrand 2009) reviews literature in the trend of the surge in executive compensation and discuss main explanations.

² (Kehoe, Pujolas, and Ruhl 2016) obtained similar results while employing the span of control model.

³ The United States Bureau of Economic Analysis reports that real GDP in the United States fell to its lowest point in 2009 and regained its pre-recession peak in 2010.

⁴ We exclude the bank industry from our sample due to a lack of sales information.

⁵ Since our data are at the firm level, we are not able to identify individual executives.

⁶ TFP is estimated by the method of Levinsohn and Petrin (2003).

⁷ Descriptive statistics of the variables are provided in Table A.1.

Additional information

Funding

This research was supported by JSPS KAKENHI Grant Numbers 17K13719 and 20K13473.