Does It Matter Where You Invest? The Impact of FDI on Domestic Job Creation and Destruction

Abstract

This study uses unique division-level data of Japanese firms to examine how foreign direct investment (FDI) affects domestic employment. Contrary to most previous studies focusing on the effect on net employment growth, we decompose it into gross job creation and gross job destruction. We find that FDI destination plays an important role: FDI to Asia increases job creation, while FDI to Europe or North America decreases it. A frictional search-and-matching model with heterogeneous jobs can explain the differential effects. The model provides additional predictions on job creation and destruction by job type, which are also empirically confirmed.

Keywords: Outward FDI, firm-establishment-division-level data, multinational enterprises (MNEs), large-firm search model, high/low-skilled jobs

JEL Classification: F23; J21; J23