*Karl P. Sauvant, PhD*
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*Columbia Center on Sustainable Investment**
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* Formerly the Vale Columbia Center on Sustainable international Investment.

“The negotiations of the United Nations Code of Conduct on
Transnational Corporations: Experience and lessons learned” and K. P.
Sauvant and F. Ortino, *Improving the International Investment Law and
Policy Regime: Options for the Future are* available at

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       *Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 148   May 25, 2015
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Adrian P. Torres ([log in to unmask])
        *Outward FDI does not necessarily cost domestic employment of MNEs
at home: **Evidence from Japanese MNEs*
In Hyeock Lee, Shige Makino and Eunsuk Hong*

Whether outward foreign direct investment (FDI) projects boost or shrink
domestic employment of multinational enterprises (MNEs) in home countries
has long been a subject of debate. On the one hand, when MNEs implement
projects abroad, it is often to replace their exports of goods and tradable
services with FDI in production abroad to serve foreign markets, which
reduces employment at home.[1] <#14d91f7837c4037c__edn1> On the other hand,
MNEs’ foreign operations may enhance production efficiency and global
market access, generating greater demand for their final outputs. As a
result, MNEs need to hire more employees in several production-related
activities that are retained in their home countries to serve the
additional foreign customers.[2] <#14d91f7837c4037c__edn2> Reflecting these
countervailing forces, numerous empirical studies have reported mixed
and/or inconclusive findings on this subject.[3] <#14d91f7837c4037c__edn3>

An investigation of the various motivations for outward FDI projects by
MNEs at the firm level sheds light on this line of research, as different
outward FDI motives[4] <#14d91f7837c4037c__edn4> could lead to variations
in MNE behavior and FDI outcomes, including the domestic employment
decisions of MNEs. A recent study[5] <#14d91f7837c4037c__edn5> explores
this argument with a sample of 604 Japanese MNEs that had established 2,345
foreign affiliates operating in 22 industries (including both manufacturing
and service sectors) across 58 countries from 1991 to 2010:

   - Outward FDI of Japanese MNEs *reduced* their domestic employment
   levels in Japan when Japanese MNEs conducted labor-seeking FDI to (1)
   relocate the labor-intensive, home-based production base to foreign
   countries with lower labor costs or (2) follow downstream customers to
   serve them in proximity using local employees.
   - Outward FDI of Japanese MNEs *increased* their domestic employment
   levels in Japan when:

   - Japanese MNEs conducted market-seeking FDI to (1) further secure
   access to immobile resources necessary for generating new markets in host
   countries, (2) establish foreign sales affiliates to serve neighboring
   foreign countries, or (3) set up regional sales headquarters in economic
   integration blocks.
   - Japanese MNEs conducted strategic asset-seeking FDI to (1) acquire
   indirect market/scientific information or (2) conduct direct
   research-and-development activities.
   - Japanese MNEs conducted efficiency-seeking FDI to spread risks across
   multiple countries through financing- and currency-hedging.

In general, the findings suggest that outward FDI of Japanese MNEs
increases their domestic employment when it enhances the MNEs’ competitive
advantages and hence further expands domestic operations, whereas it
reduces domestic employment when it involves a transfer or relocation of
domestic operations in foreign countries.

Policy implications from the evidence are two-fold. For general policy
makers striving to increase domestic employment, foreign investment policy
should focus on the promotion of competitive-advantage-enhancing outward
FDI that results in new markets, new knowledge or spread-out risks. While
governments have been proactive in attracting inward FDI to generate new
jobs within their national borders through a transfer of management
resources, business systems and new technology from foreign investors, the
study shows that the promotion of competitive-advantage-enhancing outward
FDI is also an effective way to boost the domestic employment of MNEs at
home and can be a new policy focus when countries undergo a process of
industrial restructuring. In the Japanese context, the challenge is how to
build effective incentive structures to promote
competitive-advantage-enhancing outward FDI, while ensuring that unskilled
Japanese workers are retrained instead of resorting solely to unemployment

The bottom line is that outward FDI does not always produce a hollowing-out
effect.  Policy on outward FDI should be positioned as an integral part of
a country's strategy for economic development and growth.

* In Hyeock Lee is Assistant Professor in the Management Department at the
Quinlan School of Business, Loyola University Chicago; Shige Makino is
Professor in the Department of Management at The Chinese University of Hong
Kong; Eunsuk Hong is Lecturer in the Department of Financial and Management
Studies at the School of Oriental and African Studies, University of
London. The authors are grateful to Sarianna Lundan, Padma Mallampally and
Terutomo Ozawa for their helpful peer reviews. *The views expressed by the
authors of this Perspective do not necessarily reflect the opinions of
Columbia University or its partners and supporters. Columbia FDI
Perspectives (ISSN 2158-3579) is a peer-reviewed series.*
[1] *See* K. Head and J. Ries, “Exporting and FDI as alternative
strategies,” *Oxford Review of Economic Policy*, vol. 20 (2004), pp.
[2] <#14d91f7837c4037c__ednref2> *See* S. Federico and G.A. Minerva,
“Outward FDI and local employment growth in Italy,” *Review of World
Economics*, vol. 144 (2008), pp. 295-324.
[3] <#14d91f7837c4037c__ednref3> *See* *e.g.*, Chapter 13 in J.H. Dunning
and S.M. Lundan, *Multinational Enterprises and the Global Economy*,
(Cheltenham: Edward Elgar, 2008), pp. 414-462.
[4] <#14d91f7837c4037c__ednref4> Four sets of FDI motives have been
distinguished in the literature: (1) (natural) resource-seeking, (2)
market-seeking, (3) strategic asset-seeking, and (4) efficiency-seeking.
*See* J.H. Dunning, “Location and the multinational enterprise: A neglected
factor?”, *Journal of International Business Studies*, vol. 29 (1998), pp.
[5] <#14d91f7837c4037c__ednref5> *See* E. Hong, I.H. Lee and S. Makino,
“Does outbound FDI affect domestic employment? The role of investment
motivations.” Presented at the *Annual Meeting of the Academy of
International Business*, Vancouver, Canada, June 23-26, 2014.
       *The material in this Perspective may be reprinted if accompanied by
the following acknowledgment: “In Hyeock Lee, Shige Makino and Eunsuk Hong,
‘Outward FDI does not necessarily cost domestic employment of MNEs at home:
Evidence from Japanese MNEs,’ Columbia FDI Perspectives, No. 148, May 25,
2015. Reprinted with permission from the Columbia Center on Sustainable
Investment ( <>).” A copy
should kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask] <[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Adrian Torres, [log in to unmask] or [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 147, Joachim Karl, “An appellate body for international investment
   disputes: How appealing is it?,” May 11, 2015.
   - No. 146, Anna Joubin-Bret, “Why we need a global appellate mechanism
   for international investment law,” April 27, 2015.
   - No. 145, Charles-Emmanuel Côté, “Toward arbitration between
   subnational units and foreign investors?,” April 13, 2015.

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *On July 13-17, 2015, *CCSI will host its first Executive Training on
   Investment Arbitration for Government Officials
   Columbia University. Through an intensive week-long course, government
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   academics and practitioners and will be tailored to uniquely address issues
   relevant to governments. *For more information about the program,
   please download the 2015 Executive Training Brochure here
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   - *On June 4, 2015*, CCSI, the Natural Resource Governance Institute
   (NRGI), and the United Nations Development Programme (UNDP) will host an
   evening discussion on the challenges of collective governance, drawing on
   the experience of the Extractive Industries Transparency Initiative (EITI),
   which is the subject of a new book, *Beyond Governments
   by *Eddie Rich* and *Jonas Moberg*. Wine and light hors d’oeuvres will
   be served; the book will be available for purchase at the event.
   is free, but required. Please register here
   For more information about the event, please go **here
   - *On June 15, 2015*, CCSI and the Global Economic Governance Programme
   at Oxford University will launch a new online forum on New Thinking on
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   law. *All presentations will be posted at noon EST* *here
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