To Whom Does Outward FDI Give Jobs?

Abstract

This study used the Korean industry-level data for the period of 2007–2014 to decompose the effects of outward foreign direct investment (OFDI) on overall domestic employment into the forms of OFDI, workers’ skill level and employment status. The main finding is that OFDI has no effect on the overall employment of permanent workers, while it is positively associated with the overall employment of temporary workers. These results possibly indicate that the MNEs initiating FDI, at least in Korea, prefer employing temporary workers rather than permanent workers when the success of their FDI is not clearly visible. Given the high degree of labor market rigidity in Korea, these results seem legitimate and self-explaining. Although there is little evidence that OFDI has an impact on overall domestic employment, especially for permanent workers, there does exist heterogeneous effects of OFDI on employment depending on the types of FDI, workers’ skill level and employment status.

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Notes

  1. 1.

    According to Porter (1985), these primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service.

  2. 2.

    In other words, this negative effect can occur because the MNEs and the foreign affiliates produce the same good but serve different markets.

  3. 3.

    The increases in domestic employment can be also possible through a positive firm-level scale economies in that MNEs are more likely to appear when there exists a relatively high firm-level scale economies combined with a low plant-level of scale economies.

  4. 4.

    In addition to reducing production costs, VFDI often occurs if MNEs intend to access specialized resources, such as the knowledge and advanced technologies that are abundant in foreign countries. For more details, see Sunesen et al. (2010).

  5. 5.

    Indeed, Ayumu (2012) examines the OFDI’s effect on the composition of the workforces, which is the share of temporary workers, and the author finds that manufacturing firms initiating FDI experience higher growth in their share of temporary workers than do firms that remain domestic.

  6. 6.

    Although the industry level employment can be affected by OFDI occurred in different industries through inter-industry linkage like technology spillovers across industries, we focus on the employment of firms within an industry, such as MNEs and the other related firms (e.g., subcontracting firms to MNEs and domestic supplier). See Egger and Egger (2005) and Hijzen and Swaim (2007) where they take into account the employment channels of other firms in a related industry.

  7. 7.

    In fact, the OECD indicator of the strictness of employment protection for Korea in 2013 is 2.3, which is higher than the OECD average, 2.04. Those indicators of employment protection for the U.S. and Japan are 0.26 and 1.37, respectively, while the indicators for Germany and Sweden are 2.68 and 2.61, respectively.

  8. 8.

    Permanent workers are employees with a work contract of unlimited duration or regular workers whose contract last for 12 months and over. Temporary employees can be defined as paid workers with a fixed-term contract lasting not more than one year, including occasional, seasonal work, or work lasing less than 12 months.

  9. 9.

    Export-platform-seeking FDI is motivated by a desire to exports to third countries rather than to serve the local market. VFDI for the purpose of reducing production costs should be distinguished from export-platform-seeking FDI in that VFDI is a type of export-platform-seeking FDI, where the exports from foreign affiliates are sent back to the home country. In export-platform type FDI, MNEs tend to contract with foreign affiliates within a trade block and use these affiliates to serve the entire trade block. With NAFTA, for instance, MNEs use foreign affiliates in Mexico as the export platform for the US market. For more details on this topic, see Yeaple (2003) and Moran and Oldenski (2013).

  10. 10.

    Machikita and Sato (2016) explore a link between the shift from permanent to temporary workers and economic globalization using Japanese manufacturing-level data. The authors found that outsourcing is positively associated with the replacement of permanent with temporary workers.

  11. 11.

    It should be noted that the data used in this study is industry-level data, so that the changes in employment structure within the industry rather than that within the firm can be captured as a result of OFDI. In other words, it is necessary to clarify that the data includes not only MNEs but also the other related firms, such as domestic suppliers. Thus, one cannot exclude the possibility that firms with a low productivity may prefer temporary workers to lower production costs, and to survive in competition.

  12. 12.

    OECD statistics shows that temporary employment in Korea has increased form 17% of total paid employment, in 2001, to 29% in 2006, which is the fastest rate of growth among OECD countries (Grubb et al. 2007). This increase in temporary employment is an important issue for policy makers due to the concern that the temporary nature of work may be closely related to low labor productivity.

  13. 13.

    Offshoring is defined as the whole or partial transfer abroad of a production process either to a new foreign affiliate or to an arms-length entity.

  14. 14.

    When inter-industry employment effects are taken into account offshoring, however, may have a positive effect on overall industry employment, which is consistent with the results from Egger and Egger (2005). The findings of Egger and Egger (2005) suggest that, to fully understand the overall impact of OFDI on employment in the home country, it is necessary to take into account the employment channels of other firms in a related industry.

  15. 15.

    Even though firms using HFDI tend to move all of their production activities to other countries for easier market access (market-seeking purposes), the service and R&D activities at these firms’ headquarters are relatively more skilled-labor intensive than are their other production activities, and these tend to remain in the home country. In this regard, HFDI is also likely to change the skill structure in the home country.

  16. 16.

    For the labor market effect of offshoring across education levels, see Forster-McGregor et al. (2016), where the authors examine the heterogeneous effects of offshoring on labor demand across the levels of education using the World Input-output Database (WIOD). The authors find that offshoring has negative impacts on labor demand for both low- and medium-educated labor, and that the negative effects of offshoring in developed countries are largest for high-educated workers. They explain the main causes of the negative effect on high-educated labor as a result of offshoring among developed countries.

  17. 17.

    This paper excludes Bahamas, Bahrain, Belize, British Virgin Islands, Cayman Islands, Dominican Republic, Liberia, Marshall Islands, Monaco, Panama, Saint Lucia, Samoa, Vanuatu, and Solomon Islands.

  18. 18.

    Korean government announced the deregulation plans on March 2006 to deregulate restrictions on overseas investment for corporate sectors, and it also eliminated all individual limits on foreign investment. As a consequence, outward FDI sharply increased during 2006–2007. In fact, the total amount of OFDI, which was smaller than that of inward FDI until 2007, began to exceed the inward FDI after 2008. See Pardo (2015) for more details.

  19. 19.

    Export-platform-seeking FDI is a special case of market-seeking FDI, but its aim is not that of accessing the host country market, rather than that of exploiting it as a platform to export in third countries.

  20. 20.

    The fixed-effects estimates of the lagged dependent variable can be severely biased downwards for small sample, as shown by Nickell (1981)

  21. 21.

    As an example of export-platform-seeking FDI, Moran and Oldenski (2013) mention that Ireland was one of popular locations, due to its low corporate tax rates and close proximity to EU markets. Motta and Norman (1996) develop a theoretical model of export-platform-seeking FDI, in which Free Trade Areas (FTAs) promote this type of FDI.

  22. 22.

    The medium-skill group includes clerical support workers; service and sales workers; skilled agricultural, forestry, and fishery workers; craftspersons and related trades workers; plant and machine operators; and assemblers who require some skills at the second ISCO skill level (i.e., an education level that begins at the age 14 or 15 and lasts about three years). For more detail, see ILO (2008).

  23. 23.

    It should be noted that the domestic employment of low-skilled workers has a positive relationship with OFDI, but the relationship is weak and is only significant at 10% level, so that one should use caution when interpreting a relationship between these two variables.

  24. 24.

    The signs of the coefficients on efficiency-seeking FDI are (+) for permanent workers and (−) for temporary workers, respectively and the magnitude of the coefficient for permanent workers is bigger than one for temporary workers.

  25. 25.

    See Table 9 in Appendix for the impact of OFDI on the relative demand for skilled workers (for example, the employment ratio of high-to-medium-skilled labor). According to Table 9 in Appendix, there are no significant effects of OFDI on the demand for high-skilled relative to the lowest-skilled workers, which is consistent with Marcolin et al. (2016). As noted by Marcolin et al. (2016), some empirical evidence suggests that some low-skill tasks can be complementary to high-skill ones. Second, export-platform-seeking FDI leads to an increase in the high-to-medium-skilled worker employment ratio, while other forms of FDI have no significant impact. Third, an interesting finding is that efficiency-seeking FDI has a positive effect on the employment ratio of medium-to-low-skilled workers.

  26. 26.

    See Driffield and Chiang (2009), where the authors empirically investigated the direct and indirect effects of OFDI on employment. To capture the indirect effect, they used input-output table to identify whether an industry experienced with outward FDI to China is in the supply chains.

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Acknowledgements

We are grateful to two anonymous referees for their constructive comments and suggestions. We also thank for helpful comments Young-Gui Kim, Chankwon Bae, and all participants at the KIEP seminar.

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Correspondence to Unjung Whang.

Appendix

Appendix

Table 9 The effects of OFDI on the relative demand for permanent workers by skill level

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Kang, Y., Whang, U. To Whom Does Outward FDI Give Jobs?. Open Econ Rev 29, 613–639 (2018). https://doi.org/10.1007/s11079-018-9484-1

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Keywords

  • Foreign direct investment
  • Industry-level employment
  • Skill level
  • Employment status

JEL Classification

  • F2
  • J21