Outward FDI and Home Country Employment in US Manufacturing Industries

Considerable attention has been devoted to measuring the domestic employment impacts associated with the offshoring of production and service activities by multinational firms.  To date, however, few definitive conclusions have emerged from these efforts.  The empirical work in this area has been keen to distinguish between international outsourcing per se vs. the transfer of activities to foreign subsidiaries.  Yet much of the existing evidence draws upon analyses that examine how such activities impact labor demand at the parent company, often ignoring the impact on overall employment within the home country or industry.  The present research concerns how outward FDI by U.S.-based multinationals, as manifested by an increasing use of affiliate firms, affects labor market outcomes within the domestic industry of parent firms.  This approach is useful in avoiding problems typically associated with measuring firm-level effects alone; also, an industry-level analysis is better able to capture complementary and substitutability relationships between foreign and domestic investment that are ignored in aggregate studies.  Specifically, we analyze the employment and wage effects associated with the expansion in the outward stock of FDI by firms within the 4-digit manufacturing sector over the 1997 to 2007 period.  Survey data on the operations of multinational corporations (compiled by the U.S. Bureau of Economic Analysis) is utilized, as well as information on the principal operating statistics of U.S. manufacturing firms (Economic Census of the U.S.).  These data are used to examine a number of hypotheses about the domestic labor market effects that accompany multinationals’ growing reliance on foreign affiliates.  For example, we estimate a standard employment growth regression equation which includes the outward stock of FDI as an explanatory variable.  The empirical approach also tests for the existence of a long-run relationship between outbound FDI and employment within the home industry of source firms.