The effects of foreign direct investment on job stability: Upgrades, downgrades, and separations

We use linked employer-employee data to estimate the effect of foreign direct investment (FDI) on workers’ job stability. We are the first to consider firm-internal job transitions. Specifically, we examine the impact of FDI on the individual likelihood to up- or downgrade to occupations with more or less analytical and interactive tasks. To do so, we propose an iterative matching procedure that generates a homogeneous sample of firms with equal probabilities of investing. Based on this sample, we use proportional hazard models to retrieve dynamic effects on workers. We find that FDI increases the likelihood of up- and downgrades by 25 and 37 percent, respectively. These effects increase with the share of non-routine and interactive tasks and become measurable two years after the investment. FDI does not increase the hazard of the separation of workers and firms. Instead, there is a temporal lock-in effect after the investment. Our results highlight the importance of firm-internal restructuring as a channel for adjusting to altered labor demand in response to FDI.