Do Multinational Affiliates Globalise Labour Market Decisions of Parent Firms? The Role of Global Value Chains and the Digital Sector

ABSTRACT Drawing on a firm‐level panel dataset of more than 6000 multinational parent companies and over 20,000 of their foreign subsidiaries, we find a positive and significant effect of foreign subsidiary size on parent company employment, indicating the connectedness of value chains across countries. This result is robust when we use a falsification exercise to rule out a common shock concern in the estimation. We emphasise the positioning of subsidiaries' activities that benefit parent companies in terms of employment effect. Specifically, we find that labour markets are more internationally connected when foreign subsidiaries are part of vertically integrated foreign direct investment. Moreover, the employment effect is more pronounced when companies are in the digital sector, indicating that digitalisation is conducive for companies that operate internationally. Besides, we find that the connectedness of labour markets weakens in times of heightened uncertainty, including the recent global pandemic.