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


  • Jaan Masso
  • Urmas Varblane
  • Priit Vahter


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.

Suggested Citation

  • Jaan Masso & Urmas Varblane & Priit Vahter, 2008. "The Effect of Outward Foreign Direct Investment on Home-Country Employment in a Low-Cost Transition Economy," Eastern European Economics, Taylor & Francis Journals, vol. 46(6), pages 25-59, November.
  • Handle: RePEc:mes:eaeuec:v:46:y:2008:i:6:p:25-59

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    References listed on IDEAS

    1. Bob Beachill & Geoff Pugh, 1998. "Monetary Cooperation in Europe and the Problem of Differential Productivity Growth: an argument for a 'two-speed' Europe," International Review of Applied Economics, Taylor & Francis Journals, vol. 12(3), pages 445-457.
    2. Boone, Laurence & Maurel, Mathilde, 1998. "Economic Convergence of the CEECs with the EU," CEPR Discussion Papers 2018, C.E.P.R. Discussion Papers.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, July.
    4. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
    5. Kornélia Krajnyák & Jeromin Zettelmeyer, 1998. "Competitiveness in Transition Economies: What Scope for Real Appreciation?," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 309-362, June.
    6. De Grauwe, Paul, 1996. "Monetary union and convergence economics," European Economic Review, Elsevier, vol. 40(3-5), pages 1091-1101, April.
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    Cited by:

    1. Hayakawa, Kazunobu & Matsuura, Toshiyuki & Motohashi, Kazuyuki & Obashi, Ayako, 2013. "Two-dimensional analysis of the impact of outward FDI on performance at home: Evidence from Japanese manufacturing firms," Japan and the World Economy, Elsevier, vol. 27(C), pages 25-33.
    2. Hea-Jung Hyun & Yong Joon Jang, 2015. "Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity: Theory and Evidence," Korean Economic Review, Korean Economic Association, vol. 31, pages 327-357.
    3. Kazunobu Hayakawa & Toshiyuki Matsuura & Kazuyuki Motohashi, 2016. "How Does FDI Affect Productivity at Home?: Evidence from a Plant-Level Analysis," Journal of Industry, Competition and Trade, Springer, vol. 16(4), pages 403-422, December.
    4. MATSUURA Toshiyuki, 2015. "Impact of Extensive and Intensive Margins of FDI on Corporate Domestic Performance: Evidence from Japanese automobile parts suppliers," Discussion papers 15032, Research Institute of Economy, Trade and Industry (RIETI).
    5. 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, June.
    6. 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.
    7. repec:eee:rujoec:v:3:y:2017:i:4:p:445-474 is not listed on IDEAS
    8. 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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