Does It Matter Where You Invest? The Impact of FDI on Domestic Job Creation and Destruction

Ni, Bin and Kato, Hayato and Liu, Yang (2021): Does It Matter Where You Invest? The Impact of FDI on Domestic Job Creation and Destruction.

Abstract

This study uses unique division-level data of Japanese firms to examine how foreign direct investment (FDI) affects domestic employment. Contrary to most previous studies focusing on the effect on net employment growth, we decompose it into gross job creation and gross job destruction. We find that FDI destination plays an important role: FDI to Asia increases job creation, while FDI to Europe or North America decreases it. A frictional search-and-matching model with heterogeneous jobs can explain the differential effects. The model provides additional predictions on job creation and destruction by job type, which are also empirically confirmed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Outward FDI, firm-establishment-division-level data, multinational enterprises (MNEs), large-firm search model, high/low-skilled jobs
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J21 - Labor Force and Employment, Size, and Structure; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J23 - Labor Demand

References

Alfaro, L., Chanda, A., Kalemli-Ozcan, S., and Sayek, S. (2004). FDI and economic growth: the role of local financial markets. Journal of International Economics, 64(1):89–112.

Ando, M. and Kimura, F. (2015). Globalization and domestic operations: Applying the JC/JD method to Japanese manufacturing firms. Asian Economic Papers, 14(2):1–35.

Autor, D. H. and Dorn, D. (2013). The growth of low-skill service jobs and the polarization of the US labor market. American Economic Review, 103(5):1553–97.

Autor, D. H., Dorn, D., and Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States. American Economic Review, 103(6):2121–2168.

Baldwin, R. E. (2016). The Great Convergence: Information Technology and the New Globalization. Harvard University Press, Cambridge, MA.

Blonigen, B. A. (1997). Firm-specific assets and the link between exchange rates and foreign direct investment. American Economic Review, 87(3):447–465.

Brainard, S. L. and Riker, D. A. (1997). Are US multinationals exporting US jobs? NBER Working Paper, 5958.

Cahuc, P., Marque, F., and Wasmer, E. (2008). A theory of wages and labor demand with intra-firm bargaining and matching frictions. International Economic Review, 49(3):943– 972.

Cahuc, P. and Wasmer, E. (2001). Does intrafirm bargaining matter in the large firm’s matching model? Macroeconomic Dynamics, 5(5):742–747.

Choi, J. and Xu, M. (2019). The labor market effects of the China syndrome: Evidence from South Korean manufacturing. The World Economy.

Davis, S. J. and Haltiwanger, J. (1999). Gross job flows. In Ashenfelter, O. C. and Card, D., editors, Handbook of Labor Economics, volume 3, pages 2711–2805. North-Holland, Amsterdam.

Debaere, P., Lee, H., and Lee, J. (2010). It matters where you go: Outward foreign direct investment and multinational employment growth at home. Journal of Development Economics, 91(2):301–309.

Desai, M. A., Foley, C. F., and Hines, J. R. (2009). Domestic effects of the foreign activities of US multinationals. American Economic Journal: Economic Policy, 1(1):181–203.

Dix-Carneiro, R. and Kovak, B. K. (2017). Trade liberalization and regional dynamics. American Economic Review, 107(10):2908–46.

Dossche, M., Lewis, V., and Poilly, C. (2019). Employment, hours and the welfare effects of intra-firm bargaining. Journal of Monetary Economics, 104:67–84.

Du Caju, P., Gautier, E., Momferatou, D., and Ward-Warmedinger, M. (2008). Institutional features of wage bargaining in 23 European countries, the US and Japan. Working Paper Series 154, National Bank of Belgium.

Du Caju, P., Lamo, A., Poelhekke, S., Kátay, G., and Nicolitsas, D. (2010). Inter-industry wage differentials in EU countries: What do cross-country time varying data add to the picture? Journal of the European Economic Association, 8(2-3):478–486.

Endoh, M. (2018). The effect of import competition on wages in the Japanese manufacturing sector. Asian Economic Papers, 17(1):46–67.

Feenstra, R. C., Ma, H., and Xu, Y. (2019). US exports and employment. Journal of International Economics, 120:46–58.

Fontagné, L. and Freudenberg, M. (2002). Long-term trends in intra-industry trade. In Lloyd, P. J. and Lee, H.-H., editors, Frontiers of Research in Intra-Industry Trade, chapter 8, pages 131–158. Palgrave Macmillan, London.

Froot, K. A. and Stein, J. C. (1991). Exchange rates and foreign direct investment: An imperfect capital markets approach. Quarterly Journal of Economics, 106(4):1191–1217.

Fujita, M. and Hamaguchi, N. (2012). Japan and economic integration in East Asia: Post- disaster scenario. Annals of Regional Science, 48(2):485–500.

Fukao, K., Ishido, H., and Ito, K. (2003). Vertical intra-industry trade and foreign direct investment in East Asia. Journal of the Japanese and International Economies, 17(4):468– 506.

Görg, H. and Wakelin, K. (2002). The impact of exchange rate volatility on US direct investment. The Manchester School, 70(3):380–397.

Harrison, A. and McMillan, M. (2011). Offshoring jobs? Multinationals and US manufacturing employment. Review of Economics and Statistics, 93(3):857–875.

Hayakawa, K., Matsuura, T., Motohashi, K., and Obashi, A. (2013). Two-dimensional analysis of the impact of outward FDI on performance at home: Evidence from Japanese manufacturing firms. Japan and the World Economy, 27:25–33.

Hijzen, A., Jean, S., and Mayer, T. (2011). The effects at home of initiating production abroad: Evidence from matched French firms. Review of World Economics, 147(3):457.

Hoekstra, R. (2013). Boosting manufacturing firms’ exports? The role of trade facilitation in Africa. IEE Working Papers, 197.

Hummels, D., Ishii, J., and Yi, K.-M. (2001). The nature and growth of vertical specialization in world trade. Journal of International Economics, 54(1):75–96.

Hummels, D., Munch, J. R., and Xiang, C. (2018). Offshoring and labor markets. Journal of Economic Literature, 56(3):981–1028.

Ito, K. and Ikeuchi, K. (2017). Overseas expansion and domestic business restructuring in Japanese firms. The Developing Economies, 55(2):75–104.

Johnson, R. C. and Noguera, G. (2012). Accounting for intermediates: Production sharing and trade in value added. Journal of International Economics, 86(2):224–236.

Kambayashi, R. and Kiyota, K. (2015). Disemployment caused by foreign direct investment? Multinationals and Japanese employment. Review of World Economics, 151(3):433–460.

Keller, W. and Yeaple, S. R. (2009). Multinational enterprises, international trade, and productivity growth: Firm-level evidence from the United States. Review of Economics and Statistics, 91(4):821–831.

Kimura, F., Takahashi, Y., and Hayakawa, K. (2007). Fragmentation and parts and components trade: Comparison between East Asia and Europe. The North American Journal of Economics and Finance, 18(1):23–40.

Klein, M. W., Schuh, S., and Triest, R. K. (2003). Job creation, job destruction, and the real exchange rate. Journal of International Economics, 59(2):239–265.

Kodama, N. and Inui, T. (2015). The impact of globalization on establishment-level employment dynamics in Japan. Asian Economic Papers, 14(2):41–65.

Kovak, B. K., Oldenski, L., and Sly, N. (2018). The labor market effects of offshoring by US multinational firms. Review of Economics and Statistics, 1–37.

Kudoh, N., Miyamoto, H., and Sasaki, M. (2019). Employment and hours over the business cycle in a model with search frictions. Review of Economic Dynamics, 31:436–461.

Lalé E. (2019). Search and multiple jobholding. Upjohn Institute Working Paper 19-305.

Levinsohn, J. and Petrin, A. (2003). Estimating production functions using inputs to control for unobservables. Review of Economic Studies, 70(2):317–341.

Li, H., Liu, P. W., Ye, M., and Zhang, J. (2014). Does money buy happiness? Evidence from twins in urban China. mimeo.

Luttmer, E. F. (2005). Neighbors as negatives: Relative earnings and well-being. Quarterly Journal of Economics, 120(3):963–1002.

Mandelman, F. S. and Zanetti, F. (2014). Flexible prices, labor market frictions and the response of employment to technology shocks. Labour Economics, 26:94–102

Markusen, J. R. (2004). Multinational Firms and the Theory of International Trade. MIT Press, Cambridge, MA.

Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6):1695–1725.

Moser, C., Urban, D., and di Mauro, B. W. (2010). International competitiveness, job creation and job destruction—An establishment-level study of German job flows. Journal of International Economics, 80(2):302–317.

Muendler, M.-A. and Becker, S. O. (2010). Margins of multinational labor substitution. American Economic Review, 100(5):1999–2030.

Navaretti, G. B., Castellani, D., and Disdier, A.-C. (2010). How does investing in cheap labour countries affect performance at home? Firm-level evidence from France and Italy. Oxford Economic Papers, 62(2):234–260.

Nishitateno, S. (2013). Global production sharing and the FDI–trade nexus: New evidence from the Japanese automobile industry. Journal of the Japanese and International Economies, 27:64–80.

Olley, G. S. and Pakes, A. (1996). The dynamics of productivity in the telecommunications equipment industry. Econometrica, 64(6):1263–1297.

Pischke, J.-S. (2011). Money and happiness: Evidence from the industry wage structure. NBER Working Paper, 17056.

Pischke, J.-S. and Schwandt, H. (2012). A cautionary note on using industry affiliation to predict income. NBER Working Paper, 18384.

Pissarides, C. A. (2000). Equilibrium Unemployment Theory. MIT Press, Cambridge, MA, second edition.

Qi, J., Liu, H., and Zhang, Z. (2019). Exchange rate uncertainty and the timing of Chinese outward direct investment. International Review of Economics & Finance.

Tanaka, A. (2017). Foreign direct investment and temporary workers in Japan. Journal of Asian Economics, 48:87–99.

Taniguchi, M. (2019). The effect of an increase in imports from China on local labor markets in Japan. Journal of the Japanese and International Economies, 51:1–18.

Wasmer, E. (1999). Competition for jobs in a growing economy and the emergence of dualism. Economic Journal, 109(457):349–371.

Yamashita, N. and Fukao, K. (2010). Expansion abroad and jobs at home: Evidence from Japanese multinational enterprises. Japan and the World Economy, 22(2):88–97.