FDI helps boost domestic jobs

Public policies should not be obsessed by the global competition for inward FDI.
- Professor Riccardo Crescenzi
employment 747 x 560

Government policies that aim to protect jobs by discouraging domestic firms from becoming more international through foreign direct investment (FDI) could be achieving the opposite effect, according to new LSE research.

FDI helps boost domestic jobs, particularly in less developed regions and in high-tech manufacturing and services firms, says a new paper which challenges policy-makers in virtually all advanced economies who want to curtail FDI. Among them are those who continue to endorse former US President Trump who aimed to “bring jobs back to America” by reducing foreign activities of US domestic companies.

The findings are highly relevant to the UK government’s “levelling up” agenda, and to US debates on economic recovery.

The paper, published in the Journal of Economic Geography, explains: “In many western countries, some elected office holders, journalistic commentators and think-tanks support the notion of a zero-sum game between international expansion of a country’s firms and maintaining domestic employment levels, declaring themselves in favour of ‘bringing jobs back home’ or reducing the foreign activities of their domestic companies.

“The economic crisis induced by the Covid-19 pandemic has offered further momentum to these arguments. Revived industrial and economic recovery policies in several advanced economies make explicit reference—and, in some cases, offer financial incentives—to the ‘re-shoring’ of foreign activities by domestic multinationals.

“These measures are premised on both a push for a reduction in supply chain risk and on the generation of employment and wage benefits at home. Some of this certainly pre-dates the pandemic and has to do with a major ‘China shock’ to manufacturing employment in the 2010s.”

Researchers analysed the domestic employment impacts of outward FDI undertaken by US multinational companies. They focussed on the ‘greenfield’ dimension of FDI, meaning brand new overseas investment projects which are precisely those that, the paper notes, are being “increasingly denounced in the political arena.”

They found clear evidence of an overall positive link between outward ‘greenfield’ FDI and employment levels in the USA.

The key findings are:

The link between outward FDI and domestic employment in the Economic Area that sources the investment is generally positive.

Positive domestic employment effects of outward FDI are highest in high-tech manufacturing and services industries.

Less developed regions benefit the most from the positive returns of outward FDI, especially when the FDI is sourced by their high-tech manufacturing and services firms.

Such aggregate regional effects might also increase intra-regional inequalities, in the form of increased gaps between high-skilled and low-skilled workers, as well as between workers in the most successful firms and other firms.

Riccardo Crescenzi, Professor of Economic Geography at LSE who led the study, is due to give evidence to the UK government’s Select Committee on FDI later this month. He commented: “Benefits from Foreign Direct Investment and participation in Global Value Chains are essential for recovery and inclusive growth. Our research shows that, in order to unleash these benefits, public policies should not be obsessed by the global competition for inward FDI but carefully consider the employment opportunities offered by the internationalisation of domestic firms and their search for new knowledge, skills and markets”.

Does foreign investment hurt job creation at home? The geography of outward FDI and employment in the USA is by Riccardo Crescenzi, Roberto Ganau and Michael Storper of the Global Investments and Local Development (GILD) team at LSE.