Fact of the Week: Outward Foreign Direct Investment Creates Domestic Jobs

Luke Dascoli September 13, 2021
September 13, 2021

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Source: Crescenzi et al., “Does foreign investment hurt job creation at home? The geography of outward FDI and employment in the USA,” Journal of Economic Geography, April 2021.

Commentary: Outward foreign direct investment (FDI)—more commonly known as offshoring—is often maligned as detrimental to domestic labor markets. But that assumption operates on outdated mercantilist notions of a zero-sum game for global trade and investment. In fact, investments made abroad have compounding benefits for the economy at home. When firms invest outward into foreign countries, they are deepening global value chains and growing markets overseas. This growth translates into increased sales and performance for the investing firms, which can expect a positive impact on their domestic activities.

Three economists writing in the Journal of Economic Geography have built econometric models that help quantify the relationship between outward FDI and domestic employment. Using US Bureau of Economic Analysis data on industry-specific employment and expenditures of foreign direct investment, their analysis finds that national US employment on average is positively associated at a 99 percent confidence level with increases in outward FDI.

When distinguishing employment data by U.S. industries, regression modeling shows that high-tech manufacturing and service industries enjoy the highest marginal benefit to job creation of any other domestic industry, with coefficient estimates more than double the marginal job-creation benefits expected of low-tech manufacturing and services. Employment in these industries is most benefited by outward FDI due to the foreign investments being most complementary to the performance of domestic activities within that sector. FDI therefore drives economic development for the receiving nation while creating jobs for the investing nation, so protectionist policies that attempt to secure jobs by preventing it are ultimately self-defeating.