Foreign direct investment and search unemployment : Theory and evidence

"This paper proposes a simple multi-industry trade model with search frictions in the labor market. Unimpeded access to global financial markets enables capital owners to invest abroad, thereby fostering unemployment at the extensive industry margin. Whether a country benefits from FDI in terms of unemployment depends on the respective country's net-FDI, measured as the difference between in- and outward FDI. The derived FDI and unemployment nexus is tested employing macroeconomic data for 19 OECD countries on unemployment, FDI, and labor market institutions. Results support the model in that net-FDI is robustly associated with lower rates of aggregate unemployment." (Author's abstract, IAB-Doku) ((en))Auslandsinvestitionen, Beschäftigungseffekte - internationaler Vergleich, Sucharbeitslosigkeit, Außenhandel, institutionelle Faktoren, Arbeitsmarktpolitik, friktionelle Arbeitslosigkeit, Wirtschaftszweige, Arbeitslosenquote, Arbeitskräftenachfrage, OECD

Foreign Direct Investment, Search Unemployment, and the Role of Labor Market Institutions

This paper proposes a simple multi-industry trade model with search frictions in the labor market. It will be shown that the reallocation of capital across countries in formof FDI leads to changes in unemployment at the extensive and intensive industry margins. Whether a country benefits from FDI highly depends on the respective country’s net-FDI flows. Unilateral changes in labor market institutions trigger spillover effects induced by a reallocation of industries across countries, which affects labor markets in all economies integrated through trade. The model yields two predictions that are tested in the second part of the paper by use of OECD data on unemployment, FDI, and labor market institutions. It will be shown that net-FDI is robustly associated with lower rates of aggregate and skill-specific unemployment. Finally, the theoretical and empirical findings also suggest that countries that exhibit a high degree of employment protection, or union density tend to have relatively more outward-FDI flows

Foreign direct investment and search unemployment theory and evidence

This paper proposes a simple multi-industry trade model with search frictions in the labor market. Unimpeded access to global financial markets enables capital owners to invest abroad, thereby fostering unemployment at the extensive industry margin. Whether a country benefits from FDI in terms of unemployment depends on the respective country's net-FDI, measured as the difference between in- and outward FDI. The derived FDI and unemployment nexus is tested employing macroeconomic data for 19 OECD countries on unemployment, FDI, and labor market institutions. Results support the model in that net-FDI is robustly associated with lower rates of aggregate unemployment.Diese Arbeit präsentiert ein einfaches Mehrsektoren-Außenhandelsmodell mit Suchfriktionen auf dem Arbeitsmarkt. Der ungehinderte Zugang zum weltweiten Kapitalmarkt ermöglicht Kapitaleignern mittels FDI im Ausland zu investieren. Dies hat einen Einfluss auf die Arbeitsnachfrage am extensiven (Branchen-)Rand und auf die aggregierte Arbeitslosenrate einer Ökonomie. Inwieweit die Arbeitslosenrate in einem Land positiv oder negativ beeinflusst wird, hängt von den ausländischen Netto-Direktinvestitionen ab, gemessen durch die Differenz der Kapitalimund exporte. Dieser aus dem Modell abgeleitete Zusammenhang von ausländischen Direktinvestitionen und Arbeitslosigkeit wird anhand makroökonomischer Daten für 19 OECD Länder getestet. Die Daten enthalten Informationen über Arbeitslosenquote, ausländischen Direktinvestitionen und Arbeitsmarktinstitutionen der verschiedenen Länder. Im Einklang mit den theoretischen Ergebnissen lässt sich empirisch zeigen, dass ausländische Netto-Direktinvestitionen mit einer niedrigeren, aggregierten Arbeitslosenrate verbunden sind

Firm Performance and Trade with Low-Income Countries: Evidence from China

Do firms in developing countries shift trade towards developed economies as a result of high economic growth? The matched customs-manufacturing firm data used in this study confront this hypothesized link with empirical evidence. Our analysis reveals a rising low-income country trade share around and after China's accession to the World Trade Organization. Based on this stylized fact, we analyze the link between firm characteristics and trade with low-income countries. We find evidence for sequential sorting into different export-modes according to firm productivity: i) only the most productive firms export to low-income countries, ii) exporting to low-income countries is mostly coupled to exporting to high-income countries, and iii) firms that switch to export to markets with higher potential are younger than firms that switch to export to both high- and low-income markets. Moreover, we find that firms tend to start exporting through specialization on high-income markets before diversifying to both type of markets

Trade and Unemployment: What Do the Data Say?

This paper documents a robust empirical regularity: in the long-run, higher trade openness is causally associated to a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to deal with endogeneity concerns, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we carefully purge the data from business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. The preferred specification suggests that a 10 percent increase in total trade openness reduces unemployment by about one percentage point. Moreover, we show that openness affects unemployment mainly through its effect on TFP and that labor market institutions do not appear to condition the effect of openness.international trade, real openness, unemployment, GMM models, IV estimation

Globalization and Labor Market Outcomes: Wage Bargaining, Search Frictions, and Firm Heterogeneity

We introduce search unemployment à la Pissarides into Melitz’ (2003) model of trade with heterogeneous firms. We allow wages to be individually or collectively bargained and analytically solve for the equilibrium. We find that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves aggregate productivity net of transport costs. We show that this condition is likely to be met by a reduction in variable trade costs or the entry of new trading countries. On the other hand, the gains from a reduction in fixed market access costs are more elusive. Calibrating the model shows that the positive impact of trade openness on employment is significant when wages are bargained at the individual level but much smaller when wages are bargained at the collective level.trade liberalization, unemployment, search model, firm heterogeneity

Firm Performance and Trade with Low-Income Countries: Evidence from China

Krugman's (1979, 1980) monoplistic competition model of trade showed that countries with more similar per-capita GDP trade more with each other. Does this mean that developing countries shift trade towards developed countries as a result of high economic growth? The results reported in this paper challenge the link between per-capita GDP and trade predicted by the force of gravity. The matched customs-manufacturing firm data used in this study reveal a rising low-income country trade share around and after China's accession to the World Trade Organization. Based on this stylized fact we analyze the link between firm performance and different export strategies. We find strong evidence for sequential sorting into different export-modes. i) only the most productive firms export to low-income countries, ii) export to low-income countries is coupled to export to high-income countries, iii) younger firms solely export to export markets with higher potential, and iv) low-income markets are served additionally by older firms. Moreover, we find that entry into simultaneous exports to low- and high-income destinations is associated with a higher productivity compared to the average productivity measured by incumbents' firm performance

Lohnentwicklung im Verarbeitenden Gewerbe: Wer profitiert vom deutschen Exportboom?

Deutschland ist weiterhin eine der führenden Exportnationen, auch nach der schweren Wirtschafts- und Finanzkrise 2008/2009 und dem damit verbundenen globalen Nachfrageeinbruch. Die seit Jahren zunehmende Globalisierung wird allerdings oft mit steigender Lohnspreizung und Arbeitsplatzverlusten in Verbindung gebracht. Dieser Kurzbericht untersucht die Lohnentwicklung im Verarbeitenden Gewerbe, einer Branche mit hohem Exportanteil. Der Fokus liegt dabei auf den Unterschieden zwischen exportierenden und nicht-exportierenden Betrieben

Firm performance and trade with low-income countries: Evidence from China

Do firms in developing countries shift trade towards developed economies as a result of high economic growth? The matched customs-manufacturing firm data used in this study confront this hypothesized link with empirical evidence. Our analysis reveals a rising low-income country trade share around and after China's accession to the World Trade Organization. Based on this stylized fact, we analyze the link between firm characteristics and trade with low-income countries. We find evidence for sequential sorting into different export-modes according to firm-productivity: i) only the most productive firms export to low-income countries, ii) exporting to low-income countries is mostly coupled to exporting to high-income countries, and iii) firms that switch to export to markets with higher potential are younger than firms that switch to export to both high- and low-income markets. Moreover, we find that firms tend to start exporting through specialization on high-income markets before diversifying to both type of markets.Erhöht Wachstum in Entwicklungsländern Handel mit entwickelten Ökonomien? Diese Arbeit untersucht das Exportverhalten chinesischer Firmen hinsichtlich des Handels mit Industrie- und Entwicklungsländern. Als Datenbasis verwenden wir gematchte Firmendaten mit detaillierten Informationen über Exportzielländer. Unsere Daten umfassen Chinas Beitritt in die WTO. Über den gesamten Zeitraum unserer Analyse finden wir einen leichten Anstieg der relativen Bedeutung anderer Entwicklungsländer für chinesische Exporteure. Aufbauend auf diesen stilisierten Fakten zeigt unsere Analyse, dass nur die produktivsten Firmen in Entwicklungsländer exportieren. Zum Zeitpunkt des Eintritts in den Export spezialisieren sich Firmen eher auf den Handel mit entwickelten Ökonomien. Länder mit niedrigerem Marktpotential werden tendenziell eher zusätzlich zu entwickelten Ökonomien bedient

Government efficiency and exports in China

This paper investigates the role of local governments’ efficiency on exports in China. We argue that firms located in provinces characterized by high governmental efficiency export more due to a positive productivity effect that lowers transaction costs. The analysis builds on NBS firm-level data that covers a representative sample of Chinese establishments. We find a positive correlation between provincial governments efficiency and Chinese firm’s exports. Moreover, we are able to show that the positive link between firm size and exports is magnified by governmental fficiency. Larger firms export more and this relationship is much stronger in provinces with more efficient provincial governments