Effects of OFDI on Employment and Skill Upgrading in Its Home Economy

Wen Chung Hsu 1, Chengqi Wang 2 and Jeremy Clegg 3

1Department of International Business Studies, National Chi Nan University, Nantou, Taiwan

2 Nottingham University Business School, United Kingdom

3 Leeds University Business School, United Kingdom

Abstract:  This research empirically examines the relationship between outward foreign direct investment (OFDI) and employment in its home economy. It is marked out from existing studies in the following three respects. First, instead of advanced economies, it focuses on the effect on employment in a newly industrialized economy. Second, it not only addresses the general issue of whether employment or production overseas complements or substitutes for employment in parent companies but also examines how OFDI contributes to skill upgrading in its origin economy, in addition to the quantitative effect. Third, this paper allows the results to vary between labour-intensive industries and technology-intensive industries in order to find the extent to which the home employment effect is moderated by industrial technology intensity. The results demonstrate that the location of investment and industry characteristics matter for explaining the effect of OFDI on home employment. Specifically, we find that while OFDI by Taiwan’s multinationals in the Chinese mainland depresses employment in Taiwan in both labour- and technology-intensive industries, OFDI in other economies only produces a negative employment effect in technology-intensive sectors. An interesting finding of this study is the evidence of positive effects of OFDI on skill upgrading in Taiwan. This paper supports the argument that relocation of productivity overseas axes low-skilled workers at home. Moreover, OFDI in the Chinese mainland has a particular positive impact on skill upgrading in the home industry, lending support to the view that multinational enterprises (MNEs) outsource labour-intensive goods from their affiliates in low-income economies.

Keywords: outward foreign direct investment, domestic employment, home country effect

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