How Does Investing in Cheap Labour Countries Affect Performance at Home? France and Italy

Abstract

Transferring low tech manufacturing jobs to cheap labour countries is often seen by part of the general public and policy makers as a step into the de-industrialisation of the European economies. However, several recent contributions have shown that the effects on home economies are rarely negative and often positive. Our paper contributes to this literature by examining how outward investments to cheap labour countries affect home activities of a sample of French and Italian firms that turn multinational in the period analysed. The effects of these investments are also compared to the effects of outward investments to developed economies. The analysis is carried out by using propensity score matching in order to build an appropriate counterfactual of national firms. This provides the hypothetical benchmark of what would have happened to domestic activities if firms had not invested abroad. We find no evidence of a negative effect of outward investments to cheap labour countries. In Italy they enhance the efficiency of home activities, with also positive long term effect on output and employment. For France we find a positive effect on the size of domestic activity. Investments to developed economies from both countries have essentially scale effects which eventually trickle down on employment and productivity at home.

Keywords: Multinational firms, productivity, propensity score matching

JEL Classification: C14, D21, F23