Local Labor Market Effects of Foreign Direct Investment

Author Name KIYOTA Kozo (Research Associate, RIETI) / NAKAJIMA Kentaro (Hitotsubashi University) / TAKIZAWA Miho (Gakushuin University)
Creation Date/NO. July 2019 19-J-038
Research Project Microeconometric Analysis of Firm and Industry Growth
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This paper examines the local labor market effects of foreign direct investment (FDI). One of the contributions of this paper is that we shed light on the issue of local labor markets in analyzing the effects of FDI while taking into account firm heterogeneity. To identify the location of foreign affiliates and that of domestic plants, we construct matched-foreign affiliate-domestic parent-domestic plant data using Japanese firm-, plant-, and foreign affiliate-level data. Our major findings are threefold. First, firms that engage in FDI reduce their employment. Second, the firms that do not engage in FDI increase their employment. Finally, the overall local labor market effect of FDI is positive. However, all results are not statistically significant. The result together suggests that the impact of FDI on local labor markets is extremely limited. It should be noted that the local labor market effect of FDI for firms that engage in FDI is negative and statistically significant after 2004, so such negative effects have strengthened since the mid-2000s.