The Effect of Outward Foreign Direct Investment on Home-Country Employment in a Low-Cost Transition Economy

The current extensive literature on the home-country employment effect of foreign direct investment (FDI) focuses almost exclusively on investments from high-income and high labor-cost home countries. Our paper analyzes the home-country employment effect in Estonia as a low-cost, medium-income transition economy. The data from the population of Estonian firms between 1995 and 2002 tire studied with regression analysis and propensity score matching to construct an appropriate counterfactual for firms that have invested abroad. Our results imply that the logic of the outward investments from low-cost transition and developing economies differs from that of high-income countries. The results indicate that in general, outward FDI positively effects home-country employment growth. Direct investors (domestic firms investing abroad) have a stronger home-country employment effect than do indirect investors (foreign-owned firms investing abroad) due to their smaller preinvestment size and because the subsidiaries of indirect investors are served from other locations rather than from Estonia. The positive employment effect is much stronger for investments made after 7999 due to the better macroeconomic performance of Estonia from 2000 onward. Services firms demonstrate a stronger home-country employment effect than do manufacturing firms.