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

Firms create new jobs while removing old jobs to achieve optimal performance. During the process, overseas foreign direct investment can play an important role. On the one hand, foreign expansion can reduce the funds available to be spent domestically, which leaves less room for domestic employment. On the other hand, activities of FDI can contribute to more technical progress and higher productivity, which help to create more new jobs or alleviate the destruction of existing jobs. This study uses a unique dataset of Japanese firms' overseas activities to examine the individual effects of outward FDI on domestic job creation (JC) and job destruction (JD) respectively. The results indicate that FDI into Asian countries is associated with an increase in JC while FDI to European and North American countries leads to a decrease in JC; JD decreases regardless of FDI destination. We further show that the reallocation patterns are closely related to different purposes of FDI, namely vertical and horizontal ones, varying across industries and destinations. We then rationalize the findings by applying a search-and-matching model which illustrates the mechanism explaining why vertical and horizontal FDI have different impact on domestic JC and JD. The findings provide evidence that going abroad does not necessarily lead to increasing unemployment at home.