Volatility, employment and the patterns of FDI in emerging markets

Joshua Aizenman

No 9397, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The purpose of this paper is to explore the implications of the deepening presence of multinationals in emerging markets on the cost of macroeconomic volatility there. We find that macroeconomic volatility has a potentially large impact on employment and investment decisions of multinationals producing intermediate inputs in developing countries. This is the case even for risk neutral multinationals, as their profit function is non-linear due to price and productivity effects. For industries with costly capacity, the multinationals would tend to invest in the more stable emerging markets. Higher volatility of productivity shocks in an emerging market producing the intermediate inputs reduces the multinationals' expected profits. High enough instability in such a market would induce the multinationals to diversify intermediate inputs production, investing in several emerging markets. This effect is stronger in lower margin industries. We identify circumstances where this diversification is costly to emerging markets. Such a diversification increases the responsiveness of the multinationals' employment in each country to productivity shocks, channeling the average employment from the more to the less volatile location, and reducing the multinationals' total expected employment in emerging markets.

JEL-codes: F21 F23 (search for similar items in EconPapers)
Date: 2002-12
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Aizenman, Joshua, 2003. "Volatility, employment and the patterns of FDI in emerging markets," Journal of Development Economics, Elsevier, vol. 72(2), pages 585-601, December.

Downloads: (external link)
http://www.nber.org/papers/w9397.pdf (application/pdf)

Related works:
Journal Article: Volatility, employment and the patterns of FDI in emerging markets (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9397

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9397

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().