Outward FDI does not necessarily reduce domestic employment--it often boosts it. Evidence from Japanese MNEs show that they increase domestic employment in Japan when they conduct market-seeking, strategic asset-seeking, or efficiency-seeking FDI to expand domestic operations into foreign countries, and hence enhance their competitive advantages

Hong, Eunsuk

Lee, In Hyeock

Makino, Shige

Columbia University Academic Commons

Outward FDI does not necessarily cost domestic employment of MNEs at home: Evidence from Japanese MNEs

SOAS Research Online

 Columbia FDI Perspectives Perspectives on topical foreign direct investment issues No. 148   May 25, 2015 Editor-in-Chief: Karl P. Sauvant (Karl.Sauvant@law.columbia.edu) Managing Editor: Adrian P. Torres (adrian.p.torres@gmail.com)   Outward FDI does not necessarily cost domestic employment of MNEs at home:  Evidence from Japanese MNEs by In Hyeock Lee, Shige Makino and Eunsuk Hong*  Whether outward foreign direct investment (FDI) projects boost or shrink domestic employment of multinational enterprises (MNEs) in home countries has long been a subject of debate. On the one hand, when MNEs implement projects abroad, it is often to replace their exports of goods and tradable services with FDI in production abroad to serve foreign markets, which reduces employment at home.1 On the other hand, MNEs’ foreign operations may enhance production efficiency and global market access, generating greater demand for their final outputs. As a result, MNEs need to hire more employees in several production-related activities that are retained in their home countries to serve the additional foreign customers.2 Reflecting these countervailing forces, numerous empirical studies have reported mixed and/or inconclusive findings on this subject.3  An investigation of the various motivations for outward FDI projects by MNEs at the firm level sheds light on this line of research, as different outward FDI motives4 could lead to variations in MNE behavior and FDI outcomes, including the domestic employment decisions of MNEs. A recent study5 explores this argument with a sample of 604 Japanese MNEs that had established 2,345 foreign affiliates operating in 22 industries (including both manufacturing and service sectors) across 58 countries from 1991 to 2010:   Outward FDI of Japanese MNEs reduced their domestic employment levels in Japan when Japanese MNEs conducted labor-seeking FDI to (1) relocate the labor-intensive, home-based production base to foreign countries with lower labor costs or (2) follow downstream customers to serve them in proximity using local employees.   Outward FDI of Japanese MNEs increased their domestic employment levels in Japan when:  o Japanese MNEs conducted market-seeking FDI to (1) further secure access to immobile resources necessary for generating new markets in host countries, (2) establish foreign sales affiliates to serve neighboring foreign countries, or (3) set up regional sales headquarters in economic integration blocks.   2 o Japanese MNEs conducted strategic asset-seeking FDI to (1) acquire indirect market/scientific information or (2) conduct direct research-and-development activities. o Japanese MNEs conducted efficiency-seeking FDI to spread risks across multiple countries through financing- and currency-hedging.   In general, the findings suggest that outward FDI of Japanese MNEs increases their domestic employment when it enhances the MNEs’ competitive advantages and hence further expands domestic operations, whereas it reduces domestic employment when it involves a transfer or relocation of domestic operations in foreign countries.  Policy implications from the evidence are two-fold. For general policy makers striving to increase domestic employment, foreign investment policy should focus on the promotion of competitive-advantage-enhancing outward FDI that results in new markets, new knowledge or spread-out risks. While governments have been proactive in attracting inward FDI to generate new jobs within their national borders through a transfer of management resources, business systems and new technology from foreign investors, the study shows that the promotion of competitive-advantage-enhancing outward FDI is also an effective way to boost the domestic employment of MNEs at home and can be a new policy focus when countries undergo a process of industrial restructuring. In the Japanese context, the challenge is how to build effective incentive structures to promote competitive-advantage-enhancing outward FDI, while ensuring that unskilled Japanese workers are retrained instead of resorting solely to unemployment compensations.   The bottom line is that outward FDI does not always produce a hollowing-out effect.  Policy on outward FDI should be positioned as an integral part of a country's strategy for economic development and growth.                                                            * In Hyeock Lee is Assistant Professor in the Management Department at the Quinlan School of Business, Loyola University Chicago; Shige Makino is Professor in the Department of Management at The Chinese University of Hong Kong; Eunsuk Hong is Lecturer in the Department of Financial and Management Studies at the School of Oriental and African Studies, University of London. The authors are grateful to Sarianna Lundan, Padma Mallampally and Terutomo Ozawa for their helpful peer reviews. The views expressed by the authors of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series. 1 See K. Head and J. Ries, “Exporting and FDI as alternative strategies,” Oxford Review of Economic Policy, vol. 20 (2004), pp. 409-423. 2 See S. Federico and G.A. Minerva, “Outward FDI and local employment growth in Italy,” Review of World Economics, vol. 144 (2008), pp. 295-324. 3 See e.g., Chapter 13 in J.H. Dunning and S.M. Lundan, Multinational Enterprises and the Global Economy, (Cheltenham: Edward Elgar, 2008), pp. 414-462. 4 Four sets of FDI motives have been distinguished in the literature: (1) (natural) resource-seeking, (2) market-seeking, (3) strategic asset-seeking, and (4) efficiency-seeking. See J.H. Dunning, “Location and the multinational enterprise: A neglected factor?”, Journal of International Business Studies, vol. 29 (1998), pp. 45-66. 5 See E. Hong, I.H. Lee and S. Makino, “Does outbound FDI affect domestic employment? The role of investment motivations.” Presented at the Annual Meeting of the Academy of International Business, Vancouver, Canada, June 23-26, 2014.    3 The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “In Hyeock Lee, Shige Makino and Eunsuk Hong, ‘Outward FDI does not necessarily cost domestic employment of MNEs at home: Evidence from Japanese MNEs,’ Columbia FDI Perspectives, No. 148, May 25, 2015. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at ccsi@law.columbia.edu.  For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Adrian Torres, adrian.p.torres@gmail.com or adrian.torres@law.columbia.edu.  The Columbia Center on Sustainable Investment (CCSI), a joint center of Columbia Law School and the Earth Institute at Columbia University, is a leading applied research center and forum dedicated to the study, practice and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches and solutions, as well as to analyze topical policy-oriented issues, in order to maximize the impact of international investment for sustainable development. The Center undertakes its mission through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools. For more information, visit us at www.ccsi.columbia.edu.   Most recent Columbia FDI Perspectives   No. 147, Joachim Karl, “An appellate body for international investment disputes: How appealing is it?,” May 11, 2015.  No. 146, Anna Joubin-Bret, “Why we need a global appellate mechanism for international investment law,” April 27, 2015.  No. 145, Charles-Emmanuel Côté, “Toward arbitration between subnational units and foreign investors?,” April 13, 2015.  No. 144, Herfried Wöss, “Legitimacy in WTO law and investment arbitration: the role of the contracting parties,” March 30, 2015.  No. 143, Alvaro Cuervo-Cazurra and Ravi Ramamurti, “The escape motivation of emerging market multinational enterprises,” March 16, 2015.   All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.  

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Outward FDI does not necessarily cost domestic employment of MNEs at home: Evidence from Japanese MNEs

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