The Effect of Foreign Direct Investment on Employment in Manufacturing Industry Sectors in Sub-Saharan African Countries

Sub-Saharan Africa(SSA)’s labor market has long struggled—data from the past two decades show that vulnerable employment consists of more than two thirds of employment, and, closely related, that 60-80% of employment comes from the informal sector. Industry-wise, the highest share of employment is in agriculture while the least is in manufacturing, and this trend is not expected to change, since most of the new jobs created in the past two decades have been in agriculture. With the expectation of the working-age population in the region to experience a net increase of 20 million per year over the next two decades, the need for sustained employment creation becomes more critical. And much of the hope for a solution has been placed on the role of foreign direct investment (FDI). This paper looks at the effect of manufacturing FDI on manufacturing employment in Sub-Saharan African countries, by using annual data for 16 manufacturing industry sectors in 15 SSA countries from 2003 to 2018. We find that manufacturing FDI has a positive effect on manufacturing employment at the industry sector level, which include indirect employment effects through potential spillover effects. We also look at how the effect of manufacturing FDI on manufacturing employment differs by groups of industry sectors. The results show that the effect of manufacturing FDI on employment creation varies by industry sector groups; automotive related industries create the most, followed by business machines/electronics related industries, and lastly metals/minerals related industries. The result reflects both direct and indirect employment effects via spillovers and forward and backward linkages. The paper implies that SSA countries would improve their labor market by attracting manufacturing FDI, which should also contribute to their industrial diversification/structural transformation.