Abstract
This paper highlights an inherent contradiction that exists within investment promotion activities in rich countries. Since the financial crisis, many inward investment agencies have shifted their activities from job creation per se to seeking to attract investment in high-tech activities. Such knowledge-intensive sectors are engaged in what has become referred to as “the war for talent”, so locations need to understand their value proposition to firms, especially where labour is tight. This paper explores the implications of this, in terms of the impact on employment and earnings of high skilled labour. We show that, because skill shortages already exist in many of these sectors, seeking to attract inward investment in these sectors simply causes the earnings of such workers to be bid up, and employment in the incumbent sector to fall. We highlight the over-riding importance that firms place on the availability of skilled labour when determining locations, and how policies which promote labour market flexibility, particularly through investment in skills to address skill shortages, can significantly mitigate the adverse effects, which tend to be more keenly felt in poorer regions of Europe where skilled labour is in even shorter supply.
Highlights
Knowledge-intensive firms are increasingly engaged in a global war for talent, in sectors related to science, technology and innovation
We argue that higher levels of labour market flexibility will reduce the extent to which increased labour demand resulting from inward foreign direct investment (FDI) causes wages to be bid up, and, at the same time, reduce the extent to which this causes a reduction in domestic employment
In terms of determining the effects of inward investment on overall employment, we contrast the local effects with the national effects, that is, we compare the impact of FDI in the same region as the domestic firm with the impact of FDI within the same 4-digit sector,22 but nationally
Summary
Knowledge-intensive firms are increasingly engaged in a global war for talent, in sectors related to science, technology and innovation. Similar analysis based on product market competition (see, e.g., Aitken, Harrison, Lipsey, 1996, or Markusen & Venables, 1999) allows for market conditions, for example in terms of the degree of competition in the market, or related institutions This leads to our first hypothesis: Hypothesis 1: The increased demand for skilled labour arising from FDI by foreign-owned firms crowds out domestic employment of skilled workers in research-intensive sectors. The general principle is that, given the average productivity gap between inward investors and domestic firms, the greater the absorptive capacity, the greater the level of spillovers (see Girma, 1996) Mechanisms through which these spillovers occur include technological learning and the development of innovative activities, which are highly relevant in research-intensive sectors reliant on skilled labour. We adopt the methodology of these contributions, in that we exploit GMM techniques to control for the potential endogeneity of employment and wages (Benfratello and Sembenelli, 2006; Driffield, 2006; Crespo, Fontoura, & Proenca, 2009)
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