Does it matter where you invest? The impact of foreign direct investments on domestic job creation and destruction

Bin Ni, Hayato Kato and Yang Liu

The World Economy, 2023, vol. 46, issue 1, 135-152

Abstract: This study examines how foreign direct investment (FDI) affects domestic employment by using unique division‐level data of Japanese firms. Contrary to most previous studies focusing on the effect of FDI on net employment growth, we decompose it into job creation (JC) and job destruction (JD) for each individual firm. We find that FDI destination plays an important role: FDI to Asia increases JC, whereas FDI to Europe/North America decreases it; furthermore JD decreases, regardless of FDI destination. A frictional search‐and‐matching model with heterogeneous jobs can explain the differential effects. The model provides additional predictions on JC and JD by job type, which are also empirically confirmed.

Date: 2023
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