Can language training increase the benefits of foreign direct investment?

Many low- and middle-income countries implement policies to attract FDI. Often, they designate “special economic zones,” where they invest in infrastructure and provide MNCs with favorable tax environments to establish production facilities. Since MNCs are typically larger and more productive than domestic firms, they can be a valuable source of management knowledge to domestic workers – which can offer a range of positive short- and long-run spillovers for the country. 

Previous research has established the importance of face-to-face communication in management knowledge transfer (e.g., Battiston et al. 2021). But in multinational contexts, communication is often constrained by language barriers: foreign and domestic workers often communicate in a language that is not native to either or both groups. In these cases, the positive spillover effects of FDI might be limited if language barriers prevent domestic managers from engaging with and learning from their foreign managers.

“A lot of running a business is about non-routine things – how to handle a worker who’s not showing up on time, or how to think about the strategic direction of a firm,” said Khandelwal in an EGC interview. “There’s no codifiable action plan, and that’s where language and communication become quite important."

Building on the previous literature, Khandelwal and his coauthors Louise Guillouët, Rocco Macchiavello, Madhav Malhotra, and Matthieu Teachout evaluate how language barriers within MNCs in Myanmar impact knowledge transmission. They focus on MNCs with a three-tiered management structure, where foreign managers (FMs) supervise domestic managers (DMs), who in turn supervise domestic frontline workers. Across the participating MNCs (from China, Korea, and Japan), FMs communicate with DMs in English, a non-native language to both parties. According to survey data, communication between FMs and DMs at these firms is often “lost in translation.” 

To better understand the effects of these language barriers, Khandelwal and his coauthors first evaluated whether reducing language barriers increases communication between DMs and FMs. In a randomized controlled trial, they offered a free English training course to DMs from 27 MNCs, with two 2-hour sessions per week for three months. Then the researchers compared interactions between trained DMs and their FMs with a control group of untrained DMs with similar baseline English proficiency, using a management simulation exercise and follow-up surveys. 

In this first experiment, the researchers found that DMs who received the English training communicated more with their FMs – by approximately 34 to 56 minutes per week. The trained DMs also reported learning more soft skills from their FMs, including problem-solving, negotiation, confidence, professionalism, and customer service skills. Moreover, in a performance evaluation exercise, they completed management tasks more quickly than untrained DMs.

To explore the broader benefits of language training, Khandelwal and his coauthors tested a second hypothesis: whether increased interaction with foreign supervisors is valued in the labor market. Within MNCs, FMs can be expected to communicate with their DMs only enough to meet their firm’s needs, and most likely do not account for the additional benefits that DMs gain through increased interaction. But this limits DMs’ ability to develop professional skills that have value beyond their current firm and could offer wider benefits to the domestic economy.  

Conducting a hypothetical hiring exercise, the researchers asked Burmese HR managers to rate DM candidates based on resumes and interview responses that differed in their level of experience interacting with FMs. Their findings suggest that HR managers indeed prefer candidates with experience working in MNCs and interacting with foreign managers. These candidates were offered a 9.9% wage premium, equivalent to the premium awarded for experience using Microsoft Office, a hard skill – demonstrating the strong labor-market value of communication with foreign supervisors.

“If an HR manager saw two identical resumes, except one person spent a lot of time working in a multinational with a foreign manager and the other one worked at a domestic company, the manager would take the person at the multinational,” explained Khandelwal. “That tells us that the experience is valued by domestic firms.”

These results suggest that reducing language barriers within MNCs could enhance knowledge transfers and improve labor market outcomes for domestic managers. However, such positive spillover effects are unlikely to occur on their own – since, as noted, foreign supervisors have little incentive to communicate beyond their firm’s operational needs. Because communication is non-contractible, meaning that FMs do not commit to a certain amount of communication with DMs in advance, FMs communicate less than would be optimal for DMs. To maximize the benefits of knowledge transfer from FDI, Khandelwal and his coauthors suggest that there is room for policy: by subsidizing language training, governments can help domestic supervisors working in MNCs become more productive and enhance their career opportunities

These findings extend beyond Myanmar. Many countries use English or another common language as a professional lingua franca, and some governments already recognize the benefits of language training. Uganda, for instance, began requiring Mandarin instruction in certain secondary schools following a large influx of Chinese FDI. 

But in many low- and middle-income countries, communication barriers are often overlooked when designing policies to attract FDI – ultimately undermining the potential benefits of these investments.

“Lots of countries have some kind of special economic zone policy, but they don’t always work very well,” said Khandelwal. “Aspects like language barriers can be hard to predict – so one subtle message from this research is that companies and policymakers should simply be aware of organizational constraints to knowledge sharing and knowledge transfer.