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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])
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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] 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] Reflecting these countervailing forces, numerous empirical studies have reported mixed and/or inconclusive findings on this subject. [3]
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] could lead to variations in MNE behavior and FDI outcomes, including the domestic employment decisions of MNEs. A recent study [5] 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 compensations.
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. 409-423.
[2] 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] 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] 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. 45-66.
[5] 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.
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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 (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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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 http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On July 13-17, 2015, CCSI will host its first Executive Training on Investment Arbitration for Government Officials at Columbia University. Through an intensive week-long course, government officials involved in managing investment treaty disputes or negotiating investment treaties will increase their knowledge of crucial procedural and substantive aspects of investment law. Sessions will be taught by leading 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 and application here.
- 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. Registration 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 Investment Treaties, a series of short presentations by academics, practitioners, and civil society on key topics in international investment law. All presentations will be posted at noon EST here. Please subscribe to the channel and visit our website for updates. For more information and for the schedule of speakers, please visit our website here.
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