The Wage and Employment Effects of Foreign Direct Investment

Abstract

In our globalizing world, the activities of multinational enterprises (MNEs) have increasingly pervaded many economies. In the 1980s and 1990s, foreign direct investment (FDI),¹ the main mechanism for the international expansion for MNEs, showed unequalled annual growth rates between 20 and 40 per cent. This came to an end in the new millennium when a highly unstable growth pattern began to emerge. In 2001, influenced by the economic downturn in the US, the upward trend in FDI turned abruptly into a steep fall of over 40 per cent. Then, after three ailing years, FDI growth rebounded strongly between 2005 and 2007, with yearly increases of between 33 and 47 per cent (United Nations Conference on Trade and Development [UNCTAD] 2001, 2005, 2007, 2008).² However, while FDI reached a worldwide peak in 2007, in the course of that year unmistakable signs of a slowdown appeared. The UNCTAD World Investment Report 2010 noted that worldwide FDI inflows had fallen progressively by 16 per cent in 2008 and 37 per cent in 2009. The report concluded that the economic and financial crisis significantly affected the operations of MNEs abroad in 2008–2009. However, it also pointed out that the decline of sales and value added of their foreign affiliates was less than the decline of world economic activity (UNCTAD 2010, 16). As a result, in 2010 the share of foreign affiliates’ value added reached an historic high of nearly 11 per cent of the world’s gross domestic product (GDP).