Helsingin yliopisto - Helsingfors universitet - University of Helsinki ID 2009-359
Faculty of Social Sciences
Department of Economics
Chu, Steven
Työn nimi-Arbetets titel-Title
Wage premium, knowledge transfer, and innovation
General Economics
Työn laji-Arbetets art-Level
Master's thesis
Aika-Datum-Month and year
Sivumäärä-Sidantal- Number of pages
61 s.
I firstly examine the interactions among wage premium, knowledge transfer, and innovation in a North-South model in the absence of governments. I also briefly examine a wage optimal control problem faced by firms in the model. The Northern superior technology can spill over to the Southern region through FDI and informed workers. By focusing on the effect of wage premium on knowledge transfer occurring between multinational firms and local firms, I find that Nash equilibrium exists in the game. Both a multinational firm and a southern firm would choose the same optimal strategy, given a sufficient low wage premium and a sufficient high quality of technology transfer. Wage premium paid by a multinational and a southern firm also has a direct effect on the northern innovation. Following the process of the firm’s wage decisions, I find that both wage premium and knowledge transfer occurring in the South have a close link to the innovative activities in the North. The former has positive relationship with innovation, and the latter is negatively related to innovation. Since intensity and the success of innovation are affected strongly by the abundance of human capital, and such abundance depends on investment financed by labor income, human capital formulation has a dynamical and straight relationship with the level of wage. A wage optimal control problem faced by firms is how to efficiently allocate its knowledge resource through wage control. By constructing a simple dynamical model, in which wage premium is treated as the control variable to qualify the state of human capital over time, I find that whether a dynamic steady state exists or not in the global economic system depends on the value of the wage elasticity ratio. If the ratio of the wage elasticity to the relative wage elasticity of profit is larger than the ratio of the wage elasticity to the relative wage elasticity of income, a saddle point exists in the system. Otherwise, the result is unstable focus equilibrium. The positive effect of wage premium on the human capital accumulation and therefore on innovation is ambiguous in terms of accounting an initial point of wage setting. For an employer of a multinational firm, successful protection of its superior technology through setting high wage premium depends on which starting point of the level of wage chosen by the firm. A too high or too low starting point can drive the firm’s labor policy to or diverge from the equilibrium. Since constructing of the equilibrium system is based on solving the agents’ profit-maximization problems, thus satisfying of one’s self-interest as the invisible hand will drive them to find an optimal time path for the evolution of their wealth. However, this does not mean that everyone has won the first prize without failing. In fact, both the poor and the rich, whose economic behaviors are forced by their self-interests, dependently and jointly maintain the stability of the system.
innovation knowledge multinational firms saddle point technology transfer wage premium innovaatiot tieto kansainväliset yritykset palkat
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