The Effects of Overseas Investment on Domestic Employment

Tain-Jy Chen, Ying-Hua Ku

NBER Working Paper No. 10156
Issued in December 2003
NBER Program(s):   ITI

In this paper, we study the effects of FDI on domestic employment by examining the data of Taiwan's manufacturing industry. Treating domestic production and overseas production as two distinctive outputs from a joint production function, we may estimate the effect of overseas production on the demand for domestic labor. We found that overseas production generally reduces the demand for domestic labor as overseas products serve as a substitute for primary inputs in domestic production (substitution effect). But overseas production also allows the investor to expand its domestic output through enhanced competitiveness. The expanded domestic output leads to more employment at home (output effect). The net effect of FDI on domestic employment is a combination of substitution and output effects. For Taiwan, the net effect is positive in most cases but it differs across the labor group. Technical workers tend to benefit most from FDI, followed by managerial workers, and blue-collar workers benefit the least; indeed they may even be adversely affected. This suggests that after FDI, a reconfiguration of division of labor within a firm tend to shift the domestic production toward technology and management intensive operations.

(353 K)

Published:

• Ito, Takatoshi and Andrew K. Rose (eds.) International Trade in East Asia NBER-East Asia Seminar on Economics, vol. 14. Chicago and London: University of Chicago Press, 2005. ,
• The Effect of Overseas Investment on Domestic Employment , Tain-Jy Chen, Ying-hua Ku, in International Trade in East Asia, NBER-East Asia Seminar on Economics, Volume 14 (2005), University of Chicago Press
  

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