The Impact of Territorially Concentrated FDI on Local Labor Markets: Evidence from the Czech Republic

Abstract

This paper investigates the impact of a large territorially concentrated FDI inflow on local labor market outcomes using district panel data from the Czech Republic. Toyota-Peugeot's joint investment in Kolín is used to quantify the effect of FDI on the district unemployment outflow and inflow rates, the aggregate unemployment exit hazard rates, and subsequently both the unemployment rate and the employment rate. Using difference-in-differences analysis, labor market performance of 'treatment' and 'control' districts for two periods (before and after the investment) are compared. Placebo simulations reveal that conventional least squares estimates lead to serious underestimation of standard errors. Therefore, in order to account for serial correlation, the block bootstrapping technique is used to compute consistent standard errors. The results indicate a positive significant impact of the investment on the local unemployment outflow rate driven mainly by increases in the aggregate unemployment hazard rates for durations less than nine months. However, the impact on longer unemployment durations remained negligible. Consequently, the local unemployment rate decreased and the employment rate increased in the 'treated' district.

Keywords: labor market, unemployment, employment, foreign direct investment

JEL Classification: F21, J21, J61, J64