Foreign direct investment and employment in the industrial countries

BIS Working Papers No 61
November 1998
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.