Fear of Relocation? Assessing the Impact of Italy’s FDI on Local Employment

1. Fear of Relocation? Assessing the Impact of Italy’s FDI on Local Employment Stefano Federico (Banca d’Italia) Gaetano Alfredo Minerva (Università del Piemonte Orientale) Vienna, June 3, 2005

2. Background • Widespread fears that jobs are being lost as a consequence of increased FDI (i.e. increased capital mobility by multinational firms) • Debate on policy measures against relocation to protect domestic employment • The issue must be addressed at an empirical level

3. Empirical evidence • Labor substitution in multinational companies: how do changes in foreign affiliates’ wages affect employment in parent company? (Brainard and Riker 1997, Braconier and Ekholm 2000, Konings and Murphy 2001, Becker et al. 2005) • Limitation: Results are conditional on the multinational firm already having invested • Employment performance of firms investing abroad for the first time compared with national firms (Barba Navaretti and Castellani 2004) • Limitation: Results do not take into account the destination of FDI

4. Our contribution • Extend the analysis to the whole local area to capture the presence of domestic external effects • Estimate a “modified” employment growth regression, which includes a measure of FDI outflows by industry and local area (derived from BOP data) • Apply method to data on 103 Italian provinces and 12 manufacturing industries • Disentangle the effects of FDI according to the country of destination of FDI

5. Our data • Local employment, by industry and local area • Data on the universe of local plants and firms • Years: 1996, 2001 • Allows to compute local employment growth and industrial structure • Source: Istat (National Institute of Statistics) • BOP data on FDI outflows, by industry, destination country and source local area • Include greenfield investments and foreign takeovers • Years: from 1997 to 2001 • Distribution similar to employment in foreign affiliates (Reprint database) • Source: Ufficio Italiano dei Cambi

6. FDI by destination area

7. Employment and FDI: Industry

8. Employment and FDI: Local area

9. Econometric approach • OLS estimation of modified employment growth regression: where • Local industrial structure (at 1996): Specialization, Diversity, Plant size (all normalized to the industry average) • Spatial controls: 103 dummies (Problem: High number; remedy: stratification, to be added)

10. The FDI variable: fdiprop,i • Sum of FDI outflows over the years 1997-2000 (excluding therefore 2001) • We divide FDI by employment in order to control for the size of the economic activity in each {p,i} • We normalize it to the industry average • This is equivalent to the share of FDI on the industry total divided by the corresponding share in terms of employment:

11. Interpretation of fdiprop,i • If larger than one, FDI per employee in a given {p,i} is larger than the national average in the same industry OR • If larger than one, the share of FDI over the industry total is larger than the corresponding share of workers • Both interpretations point to a high propensity to invest abroad

12. Results (OLS) Tails of dependent variable excluded.In (4) and (5): i) only {p,i} with positive FDI are considered; ii) fdiprop,i is taken in logarithm.

13. Robustness analysis • FDI only towards new EU Member States from Central and Eastern Europe • Sector specificities (Interaction between fdiprop,i and sector dummies) • Different construction of the FDI variable (share on industry total) • Employment in plants located beyond the local area

14. Discussion • No evidence that local employment growth, relatively to the industry average, is negatively affected by FDI propensity (relationship is even positive for FDI to advanced countries) • Problem (endogeneity): Unobserved variables (local firms’ average productivity, other competitive advantages), correlated with FDI. • Other caveats: 1) short time period; 2) “outsourcing” (non-equity FDI) is missing