The Effects Of Foreign Investment On Jobs At Home R&D-Intensive Firms Reduce Employment While Skilled Labour-Intensive Firms Raise It

The impact of investment elsewhere in the world on employment back at home depends on whether the home country''s comparative advantage lies in R&D-intensive high-tech products or in skilled labour-intensive sectors. For example, if a US multinational increases sales from its foreign operations by $1 million, it employs one less person at home. In contrast, if a Swedish firm increases sales from its foreign operations by the same amount, home employment will increase by one person.

According to Professor Magnus Blomström, Gunnar Fors and Dr Robert Lipsey, writing in the Economic Journal, these effects do not come from any substitution between foreign production and home exports, but from the changes in labour requirements per unit of output in the home operation.

Both the US and Sweden invest mainly in developed countries. The home employment effects of these investments are much smaller per unit of output than from investments in developing countries. US firms, whose home-country comparative advantage is in R&Dintensive high-tech products, invest much more than Swedish firms in export-oriented developing countries and use their operations in these countries to economise on labour in production for world markets.

The result of this strategy is that for US firms, even adding $1 million of output at home and a similar amount in developing countries would reduce home employment. The reason is that the foreign production would replace the most labour-intensive home production and the additional home production would be capital or R&D-intensive. Swedish firms invest much less in developing countries than US multinationals and when they do, they invest in production for local markets rather than world markets. Foreign production by Swedish firms in both developed and developing countries adds to blue collar employment at home.

This indicates that Swedish multinationals tend to allocate their blue collar-intensive production to their home operations. Production by Swedish affiliates in developing countries, but not in developed countries, tend to increase white collar employment at home.

Blomström and his colleagues suggest that a possible explanation for the difference in strategies between US and Swedish multinationals is that it reflects the difference in comparative advantage between the two home locations, as revealed by the composition of trade with each other. Most of Sweden''s exports to the US are from skilled labourintensive sectors while most US exports to Sweden are from R&D intensive sectors.

The researchers conclude that if Sweden''s specialisation runs that way, it would be logical for Swedish multinationals to place the skilled labour-intensive part of their production at home and the R&D-intensive part in the US or other countries more suited than Sweden to such production. The same logic would persuade US multinationals to concentrate their R&D-intensive production at home.

''Foreign Direct Investment and Employment: Home Country Experience in The
United States and Sweden'' by Magnus Blomström, Gunnar Fors and Robert E. Lipsey is
published in the November 1997 issue of the Economic Journal. Blomström and Fors are at
the Stockholm School of Economics; Lipsey is at the City University of New York.