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The Effect of Outward Foreign Direct Investment on Home-Country Employment in a Low-Cost Transition Economy

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Author Info

  • Jaan Masso
  • Urmas Varblane
  • Priit Vahter

Abstract

The current extensive literature on the home-country employment effect of foreign direct investment (FDI) focuses almost exclusively on investments from high-income and high labor-cost home countries. Our paper analyzes the home-country employment effect in Estonia as a low-cost, medium-income transition economy. The data from the population of Estonian firms between 1995 and 2002 are studied with regression analysis and propensity score matching to construct an appropriate counterfactual for firms that have invested abroad. Our results imply that the logic of the outward investments from low-cost transition and developing economies differs from that of high-income countries. The results indicate that in general, outward FDI positively affects home-country employment growth. Direct investors (domestic firms investing abroad) have a stronger home-country employment effect than do indirect investors (foreign-owned firms investing abroad) due to their smaller preinvestment size and because the subsidiaries of indirect investors are served from other locations rather than from Estonia. The positive employment effect is much stronger for investments made after 1999 due to the better macroeconomic performance of Estonia from 2000 onward. Services firms demonstrate a stronger home-country employment effect than do manufacturing firms.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Eastern European Economics.

Volume (Year): 46 (2008)
Issue (Month): 6 (November)
Pages: 25-59

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Handle: RePEc:mes:eaeuec:v:46:y:2008:i:6:p:25-59

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106044

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Cited by:
  1. OBASHI Ayako & HAYAKAWA Kazuo & MATSUURA Toshiyuki & MOTOHASHI Kazuyuki, 2009. "A Two-dimensional Analysis of the Impact of Outward FDI on Performance at Home: Evidence from Japanese manufacturing firms," Discussion papers 09053, Research Institute of Economy, Trade and Industry (RIETI).
  2. Ivo Karilaid & Tõnn Talpsepp, 2010. "Can policy improve liquidity during a financial crisis?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 10(2), pages 5-26, December.
  3. Ludo Cuyvers & Reth Soeng, 2011. "The effects of Belgian outward direct investment in European high-wage and low-wage countries on employment in Belgium," International Journal of Manpower, Emerald Group Publishing, vol. 32(3), pages 300-312, July.
  4. Dierk Herzer, 2010. "The Long-Run Relationship between Outward FDI and Total Factor Productivity: Evidence for Developing Countries," Ibero America Institute for Econ. Research (IAI) Discussion Papers 199, Ibero-America Institute for Economic Research.

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