Does FDI Really Affect Employment In Host Countries?: Subsidiary Level Evidence

Abstract

Despite significant flows of Foreign Direct Investment (FDI) and the perceived benefits (i.e. in terms of economic growth and innovation of productive techniques) that this type of flows can have on the receiving economies, very little has been learned about its potential contribution to employment generation in the host countries. The difficulty in measuring the impact of FDI on employment generation stems from the fact that these flows that tend to generate higher levels of economic activity and employment can potentially also lead to employment losses that may occur from increased competition, technological improvements that make production relatively more capital intensive, or from the use of different business practices. We examine the relevance of FDI in generating employment in host countries by estimating the impact on changes in subsidiary employment caused by changes—in the level of foreign investment in such subsidiary. Using Javorcik and Sparteneau (2005) approach, we measure FDI as the change in a subsidiary's assets controlled by a given MNC from another country. We use annual data derived from the OSIRIS database to create a sample of 5,641 subsidiaries operating in 66 host countries during the 2006-2008 time period and estimate a simple labor market specification using pooled OLS regression techniques with robust standard errors to correct for cluster sampling. Our results indicate that the heralded positive impact that FDI should have on employment at the subsidiary level is not a typical occurrence, but it does exist under specific circumstances. We show that the FDI has a positive effect on subsidiary employment in host countries located in the Americas, and when FDI originates from Asian-based MNCs. We also find a positive effect on subsidiary employment for FDI in the manufacturing and mining sectors, when FDI comes from a MNC headquartered in a low- and middle-income country, and when the subsidiaries operate in low- and middle-income countries. Furthermore, the analysis shows that FDI has a positive impact on subsidiary employment generation for companies that reduce their disinvestment, and for subsidiaries operating in countries where the country-level FDI as a share of GDP is smaller. These findings suggest that countries and policymakers should take these factors into consideration when formulating policies to enhance employment opportunities in their countries through higher levels of FDI, but it is not realistic for countries with different characteristics to expect the same effect on employment from foreign investment.