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Volatility, employment and the patterns of FDI in emerging markets


  • Joshua Aizenman


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.

Suggested Citation

  • Joshua Aizenman, 2002. "Volatility, employment and the patterns of FDI in emerging markets," NBER Working Papers 9397, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9397
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    References listed on IDEAS

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    Cited by:

    1. Jinjarak, Yothin, 2007. "Foreign direct investment and macroeconomic risk," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 509-519, September.
    2. Aizenman, Joshua & Marion, Nancy, 2004. "The merits of horizontal versus vertical FDI in the presence of uncertainty," Journal of International Economics, Elsevier, vol. 62(1), pages 125-148, January.
    3. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    4. Chenaf-Nicet, Dalila & Rougier, Eric, 2016. "The effect of macroeconomic instability on FDI flows: A gravity estimation of the impact of regional integration in the case of Euro-Mediterranean agreements," International Economics, Elsevier, vol. 145(C), pages 66-91.
    5. Kamel ABDELLAH ( GREThA, CNRS, UMR 5113 & ISG, UNIVERSITE DE TUNIS) & Dalila NICET-CHENAF (GREThA, CNRS, UMR 5113) & Eric ROUGIER (GREThA, CNRS, UMR 5113), 2012. "FDI and macroeconomic volatility: A close-up on the source countries," Cahiers du GREThA 2012-21, Groupe de Recherche en Economie Théorique et Appliquée.
    6. Desbordes, Rodolphe, 2007. "The sensitivity of U.S. multinational enterprises to political and macroeconomic uncertainty: A sectoral analysis," International Business Review, Elsevier, vol. 16(6), pages 732-750, December.
    7. Sumon Kumar Bhaumik & Saul Estrin & Klaus E Meyer, 2007. "Determinants of Employment Growth at MNEs: Evidence from Egypt, India, South Africa and Vietnam," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 49(1), pages 61-80, March.
    8. repec:bla:apacel:v:31:y:2017:i:2:p:78-95 is not listed on IDEAS
    9. Jellal, Mohamed, 2014. "Diaspora transferts et volatilité économique
      [Diaspora transfers and economic volatility]
      ," MPRA Paper 57288, University Library of Munich, Germany.
    10. Demir, Firat, 2013. "Growth under exchange rate volatility: Does access to foreign or domestic equity markets matter?," Journal of Development Economics, Elsevier, vol. 100(1), pages 74-88.
    11. Mico Apostolov, 2016. "Cobb–Douglas production function on FDI in Southeast Europe," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 5(1), pages 1-28, December.
    12. Tullio Buccellato & Francesco Santangelo, 2009. "Foreign direct investments distribution in the Russian Federation: do spatial effects matter?," UCL SSEES Economics and Business working paper series 99, UCL School of Slavonic and East European Studies (SSEES).
    13. Thomas Edward Flores & Irfan Nooruddin, 2011. "Credible Commitment in Post-Conflict Recovery," Chapters,in: The Handbook on the Political Economy of War, chapter 23 Edward Elgar Publishing.
    14. Julio, Brandon & Yook, Youngsuk, 2016. "Policy uncertainty, irreversibility, and cross-border flows of capital," Journal of International Economics, Elsevier, vol. 103(C), pages 13-26.
    15. Eswar S. Prasad & Kenneth Rogoff & Shang-Jin Wei & M. Ayhan Kose, 2007. "Financial Globalization, Growth and Volatility in Developing Countries," NBER Chapters,in: Globalization and Poverty, pages 457-516 National Bureau of Economic Research, Inc.
    16. Brandon Julio & Youngsuk Yook, 2013. "Policy uncertainty, irreversibility, and cross-border flows of capital," Finance and Economics Discussion Series 2013-64, Board of Governors of the Federal Reserve System (U.S.).
    17. Villa, Stefania., 2010. "Exploring the linkages between investment and employment in Moldova : a time-series analysis," ILO Working Papers 994553423402676, International Labour Organization.
    18. Yang-Ming Chang & Philip Gayle, 2009. "Exports versus FDI: do firms use FDI as a mechanism to smooth demand volatility?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(3), pages 447-467, October.
    19. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2006. "Capital Controls, Liberalizations, and Foreign Direct Investment," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1433-1464.
    20. Ayhan Kose & Kenneth Rogoff & Eswar S Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries; Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
    21. Xun, Lei & Awokuse, Titus O., 2005. "The Determinants of US Outgoing FDI in the Food-Processing Sector," 2005 Annual meeting, July 24-27, Providence, RI 19131, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    22. International Monetary Fund, 2004. "Risk Instability and the Pattern of Foreign Direct Investment in the Middle East and North Africa Region," IMF Working Papers 04/139, International Monetary Fund.
    23. repec:ilo:ilowps:455342 is not listed on IDEAS

    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business


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