Determinants of Employment Growth at MNEs: Evidence from Egypt, India, South Africa and Vietnam

Abstract

Many foreign investment operations into emerging markets are small, and are likely to have only a limited impact on the local economy. However, host governments often expect transfer of advanced technology from multinational enterprises (MNEs) operating in these markets to local firms by way of inter-firm mobility of skilled labourers. The extent of such transfers would be limited, among other factors, by the size of the pool of skilled labourers that can potentially be mobile between MNEs and local firms. This, in turn, is determined by employment growth at the MNEs. We develop an empirical specification that models this employment growth, by drawing on both the economics and international business literature. This model is then estimated using firm-level data from four emerging markets. We find that wholly owned foreign direct investment operations have higher employment growth, while local industry and institutional characteristics moderate the growth effect. This suggests that policies encouraging foreign investors to set up in form of joint ventures may not actually raise the benefits for the host economy.

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Notes

  1. 1.

    The evidence linking MNE presence in a sector in a developing country to technological improvements among domestic firms in the same sector is mixed (see Blomstrom and Kokko, 1998). Specifically, it has been argued that the extent of the spillover would significantly depend on the ability of the local firms to assimilate the new technology in their own production processes (Kokko, 1994).

  2. 2.

    There is also evidence from countries like Kenya that only a small proportion of labourers (especially managers) leave MNEs to join local firms in developing countries (Gershenberg, 1987). Further, Altenburg (2000) reports that spin-off electronics companies in Malaysia maintain close relations as suppliers and subcontractors with the MNE, while Hill (1982) makes similar observations in the Philippine appliance and motorcycle industry. But, by and large, inter-firm mobility of labour is widely accepted as a channel through which technology spillovers of FDI take place (see Dosi, 1988).

  3. 3.

    Note that the overall extent of economic freedom may have an overlap with the regulations governing FDI in emerging markets.

  4. 4.

    This distinction has important implications for how investors set up their operations (Buckley and Casson, 1998). Local production for local markets eliminates the cost of transporting the product from production locations in other countries, and are also able to eliminate tariffs from the retail price of the product, thereby making it competitive vis a vis the domestic and import competition in the new location. Local production facilities also endow MNEs with the flexibility in the production process that is required to appeal to local tastes and preferences (Bartlett and Ghoshal, 1989). Resource-seeking investment, on the other hand, permits MNEs to leverage the resources available in the new production location – be it petroleum in Egypt, precious metals in South Africa, skilled IT personnel in India or cheap low-skilled labour in Vietnam – to give its global operation a competitive edge over its rivals.

  5. 5.

    The Hecksher–Ohlin theory about international specialisation argues that most developing countries have a comparative advantage in labour-intensive products. Therefore, resource-seeking MNEs are even more likely to opt for labour-intensive production techniques if they use developing country as a location for downstream units of their supply chain, or as an export base to the rest of the world.

  6. 6.

    As we have seen earlier in the paper, threat of competition may adversely affect employment growth (and employee training) for other reasons as well (Campbell and Vousden, 2003).

  7. 7.

    Of these, 23 per cent are from Egypt, 22 from India, 30 per cent from South Africa and 25 per cent from Vietnam. In related research in which roughly the same sample was used, we used the Heckman two-step method to examine whether there is a selection bias with respect to the MNE affiliates that did not provide information that led to the generation of missing values. Our analysis suggested that the missing values are random in nature, and do not owe their origin to selection bias.

  8. 8.

    Since the 50 per cent cutoff point is plausible yet ad hoc, we experimented with other cut off points ranging from 30 to 70 per cent, but the econometric results, reported later in the paper, remained unaltered.

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Acknowledgements

We are grateful to Simon Commander, Stephen Gelb, Danchi Tan, two anonymous referees and editor Jeffrey Miller for helpful comments, to the Egyptian, Indian, South African and Vietnamese country teams for the collection of data, and to Caitlin Frost, Maria Bytchkova, Gherardo Girardi for excellent research assistantship. We remain responsible for all remaining errors. The research was made possible by a research grant from the UK's Department for International Development.

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Bhaumik, S., Estrin, S. & Meyer, K. Determinants of Employment Growth at MNEs: Evidence from Egypt, India, South Africa and Vietnam. Comp Econ Stud 49, 61–80 (2007). https://doi.org/10.1057/palgrave.ces.8100161

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Keywords

  • MNE
  • employment growth
  • control
  • institutions

JEL Classifications

  • O13
  • O33
  • J21
  • F23