Abstract
This paper studies interaction and cross-country-spillover effects between FDI and labor markets in a Feenstra and Hanson type of trade model with imperfect labor markets due to search friction a la Pissarides (2000). I can show that FDI outflows increase aggregate equilibrium unemployment in the FDI sending country whereas the receiving country benefits from FDI-inflows and expands production to industries formerly associated to the sending country. The analysis of unemployment in a continuum of industries framework fascilitates the distinction between adjustments at the intensive and extensive margin of labor demand resulting in an ex-ante ambiguous effect of FDI on unemployment. Changes in labor market institutions also affect FDI-flows and lead to spillover effects between the integrated countries’
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