Foreign Direct Investment and Employment in the Industrial Countries

Abstract

Fax: +41 61 / 280 91 00 and +41 61 / 280 81 00This publication is available on the BIS website at www.bis.org. Since the trough in 1982, the growth of real foreign direct investment (FDI) outflows and inflows for the OECD countries has been very high, far outpacing that of foreign trade and real GDP. While such flows are likely to have increased the efficiency with which global capital is being used, they have also led to concerns that outflows from the industrial countries serve as an instrument for exporting jobs to low-wage countries. The purpose of this paper is to look for evidence regarding the precise relationship between FDI outflows and employment in the source countries. The empirical evidence mostly relies on estimated relationships between FDI flows and various components of demand but is derived from time-series analyses for individual countries as well as from panel regressions. All in all, we find only limited evidence that FDI outflows lead to job losses in the source countries. While it is true that domestic investment tends to decline in response to FDI outflows, emerging market economies receive only a small, albeit growing, share of global outflows. It also appears that high labour costs encourage outflows and that exchange rate movements may exacerbate such effects. However, the principal determinants of FDI flows are prior trade patterns, IT-related investments and the scope for cross-border mergers and acquisitions. Moreover, there is clear evidence that, by improving distribution and sales channels, FDI outflows complement rather than substitute for exports and thus help protect rather than destroy jobs in the source countries. © Bank for* Without implication we acknowledge comments on an earlier draft by R. Lipsey and participants in seminars at York University, the Deutsche Bundesbank and the Bank of Canada. We would also like to thank S. Arthur for overseeing the publication and L. Morandini for expert secretarial assistance well beyond her call of duty.

Outflow FDI and Domestic Investment: Aggregated and Disaggregated Analysis

“…In contrast, there are positive effects of OFDI on the domestic investments in the short-term for Germany. Similar results were confirmed by the study conducted by [13] for the US, Japan, Germany and the UK using data covering the time from the 1960s to the 1990s. If OFDI displaces the exports, its effects on the domestic investment remain ambiguous.…”

“…The last strands of literature show a mixed relation between OFDI and domestic capital formation [13]. For example, the study conducted by [19] analyses the effects of aggregate and disaggregates FDI on domestic investments in the GCC region.…”

“…Second, OFDI can hinder domestic capital formation even through the channel of goods markets [9]. Many empirical studies observed an adverse impact of OFDI on domestic capital formation for the USA, Japan, Germany and the UK [13][14][15][16]. Such contrasting empirical evidence motivates us to reassess the subject more robustly.…”

Growth in Foreign Trade in Liberalized India: The Relevance of FDI

“…Notably, until a couple of years back, India did not see the FDI and export as two complementary forces though referred by the economics scholars worldwide (Andersen & Hainaut, 1998;Pfaffermayar, 1996). According to Panagariya and Krishna (2019), if we make a comparison of export of India and China, we observe that Indian policymakers have not been able to attain the sophistication of its export to the same extent that China has.…”

“…Besides, there is empirical evidence that suggests the presence of a bidirectional relationship between FDI and export in various developed and developing economies. Andersen and Hainaut (1998) in the context of the USA, Japan and Germany; Pfaffermayar (1996) in context of Austrian markets; Liu et al (2002) in context of China; Pacheco-Lopez (2005) in context of Mexico; and Keho (2015) on sub-Saharan African economies document a bidirectional causal link between the variables.…”