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The Effects of Overseas Investment on Domestic Employment


  • Tain-Jy Chen
  • Ying-Hua Ku


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.

Suggested Citation

  • Tain-Jy Chen & Ying-Hua Ku, 2003. "The Effects of Overseas Investment on Domestic Employment," NBER Working Papers 10156, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10156
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    References listed on IDEAS

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    Cited by:

    1. Yunhua Liu & Beoy Kui Ng, 2007. "Impact of A Rising Chinese Economy and ASEAN’s Responses," Economic Growth Centre Working Paper Series 0703, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    2. Chih‐Hai Yang & Yi‐Yin Wu & Hui‐Lin Lin, 2010. "Outward Investment To China And Local Innovation Of Taiwanese Manufacturing Firms," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 538-557, 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, June.
    4. Elia, Stefano & Mariotti, Ilaria & Piscitello, Lucia, 2009. "The impact of outward FDI on the home country's labour demand and skill composition," International Business Review, Elsevier, vol. 18(4), pages 357-372, August.
    5. World Bank, 2006. "Foreign Capital Utilization in China : Prospects and Future Strategy," World Bank Other Operational Studies 19623, The World Bank.
    6. Liu, Yunhua, 2007. "Facing the challenge of rising China: Singapore's responses," Journal of Policy Modeling, Elsevier, vol. 29(3), pages 505-522.
    7. Tsou, Meng-Wen & Liu, Jin-Tan & Hammitt, James K. & Chang, Ching-Fu, 2013. "The impact of foreign direct investment in China on employment adjustments in Taiwan: Evidence from matched employer–employee data," Japan and the World Economy, Elsevier, vol. 25, pages 68-79.
    8. Damijan, Jože & Kostevc, Crt & Rojec, Matija, 2014. "Outward FDI and company performance in CEECs," Working Paper Series in Economics and Institutions of Innovation 381, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.

    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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