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Foreign direct investment and search unemployment: Theory and evidence

Hans-Jörg Schmerer

International Review of Economics & Finance, 2014, vol. 30, issue C, pages 41-56

Abstract: This paper proposes a simple multi-industry trade model with search frictions in the labor market. Unimpeded access to global financial markets enables capital owners to invest abroad, thereby fostering unemployment at the extensive industry margin. Whether a country benefits from foreign direct investments (FDI) in terms of unemployment depends on the respective country's net-FDI, measured as the difference between in- and outward FDI. The link between FDI and unemployment derived in the model is tested using macroeconomic data for 19 OECD countries on unemployment, FDI, and labor market institutions. Results support the model in that net-FDI is robustly associated with lower rates of aggregate unemployment.

Keywords: Trade; Foreign direct investment; Search unemployment; Labor market frictions (search for similar items in EconPapers)
JEL-codes: F16 E24 J6 F21 (search for similar items in EconPapers)
Date: 2014
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