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FDI and unemployment, a growth perspective
Author(s) -
Stepanok Ignat
Publication year - 2023
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12643
Subject(s) - foreign direct investment , unemployment , economics , imitation , welfare , labour economics , investment (military) , endogenous growth theory , intellectual property , international economics , international trade , market economy , macroeconomics , human capital , psychology , social psychology , politics , political science , computer science , law , operating system
North–South foreign direct investment (FDI) is frequently viewed as a process in which jobs relocate from the North to the South. I build a growth model with two asymmetric trading economies, the North where firms innovate and the South where Northern firms invest to take advantage of lower wages. Contrary to expectation, I find that lower FDI costs increase unemployment both in the North and in the South. There are two effects of FDI on unemployment, a direct positive one which contributes to the turnover of firms parallel to innovation. The indirect effect appears through innovation and growth: more FDI means higher innovation, this intensifies firm turnover and increases the unemployment rates in both countries even further. I solve the model analytically without trade costs and imitation of products in the South. For the version with trade costs and imitation I offer a numerical solution in which I also look at the effect of FDI on welfare and find a positive relation. In addition to FDI, I explore how intellectual property (IP) rights protection affects unemployment and welfare. Both are higher in a steady state with stricter IP protection.