"The Effect of Foreign Direct Investments on the Employment"

Literature Review:

The most imperative and attractive way to attract foreign investment holds the policy to reduce underemployment. Employment is basically depends upon the capital populated in a country. Shortage of capital is specifically populated in poor countries that lead to unemployment. Foreign direct investment is not criticized in Pakistan. Evaluating the drawbacks and advantages of FDI we need to look at foreign direct investment policy of developed countries. The study of Blomstrom, et.al (1997) to find out the relation between foreign direct investments policy of United States and Sweden and the employment strategy .Further find out the benefits of the foreign labor intensive production and home base labor incentive production by comparing US and Swedes FDI policy. Studies revealed the relation between foreign affiliate production and parent employment in US manufacturing multinationals with that in Swedish firms. The methodology is concerned with the tasks of developing and applying quantitative methods to the study and elucidation of the phenomenon. Study revealed that US firms produce much more of their foreign output in developing countries, about 20% in 1994, compared with only 7% among Swedish firms. Swedish multinationals produce relatively little in developing countries and most of that has been for sale within host countries with import-substituting trade regimes. US affiliates in developing countries appear to be much more a part of an allocation of the MNCs' production for world-wide markets to take advantage of factor price differences.

Developed countries often outsource their labor intensive work to developing countries including Pakistan. As we know in Pakistan brain drain is very high. Skilled and high professional individuals not find enough opportunities to stay in Pakistan. The study of Buffie (1993) investigated the impact of the FDI on the domestic capital allocation and underemployment. Study also focused on the uncertainty of the domestic welfare of FDI in manufacturing sectors. Study also attempted to find out the short run effect and long run effect of FDI as underemployment. In research methodology, regression analysis included as technique for modeling and analyzing several variables. Conclusion showed that Manufacturing sector is highly uncertain. While underemployment is likely to diminish in the short run over the long run the outcome is adverse. FDI in manufacturing sector improve the welfare. Underemployment declines and the domestically-owned capital stock expand steady.

Developed countries in recent time increased its outward FDI to gain more returns. To develop the employment developing countries like Pakistan often use inward FDI as a source of growth and employment. Whereas on the other hand developed countries are more grown rapidly in term of outward FDI and its returns. The study of Lane and Milesi-Ferretti (2003) found that recent decades, foreign assets and liabilities in advanced countries have grown rapidly. The portfolio equity and foreign direct investment (FDI) categories have grown in importance relative to international debt market. Study taken the international financial integration for a sample of industrial countries and seek to explain the cross-country and time-series variation in the size of international balance sheets. Study also examined the behavior of the rates of return on foreign assets and liabilities, relating them to "market" returns. The study also indentified countries holding large portfolio equity and foreign direct investment (FDI) portfolios that may take most of their returns in the form of capital gains. In this research several ratios methods used to analyzed. Results showed that developed countries have a considerable raise in their FDI and its returns. International cross-holdings of foreign assets and liabilities have a considerably increased.

Economic development in Pakistan is the associated with various elements, including investment and employment consider the major elements. Employment in Pakistan is very much dependent on the foreign affiliation investment. Most of developing countries including Pakistan are not motivated toward self employment and entrepreneurship concepts. The study of Alfaro and Andrew (2007) examine the FDI and Growth at the Industry Level, FDI and industry characteristics, FDI and financial dependence, FDI and Human Capital formation, and FDI and Country Targets. In research methodology, regression analysis included as technique for modeling and analyzing several variables. Study mentioned that the effect of FDI on economic growth is important for a number of reasons. It has implications for the effect of rapidly growing investment flows on the process of economic development. If FDI does not exert a robust positive influence on growth, these pecuniary incentives and the active international competition for investment should be reconsidered. Study resulted that the higher effects for industries dependent on external finance and those reliant on highly skilled labor. FDI has not an effect on total factor productivity.

The study of Lim (2001) focused on two things first recent literature regarding positive externalities from FDI and the second part focused on the determinants of FDI. The study methodology is the correlation with economic growth, and its determinants. Result of the research is that there is a positive relationship between economic growth and FDI.

Pakistan economic growth is not consistent enough due to lack of policies continuity. Similarly employment in Pakistan is also affected by the lack of continuity of policy. Pakistan is a country where there is a high proportion of labor intensive worker, whereas skilled worker in Pakistan not find enough opportunities causes brain drain. Brain drain from developing countries causes a decline in demand of skilled worker in developed countries. The study of Freeman (1995) mentioned that there is a decline demand of skilled worker in developed countries. Similarly also mentioned that there is a specifically increased in the less skilled worker jobs to the developing countries. Study also elaborated the trade of US and European countries with Third world countries.

Employment in remote areas of Pakistan is particularly limited. Whereas metropolitan are much more prosperous in terms of employment causes severe problems. Foreign direct investment in any particular city weather the city is developed or undeveloped increases employment in that area. And also have positive effects on FDI in nearby cities. The study of Coughlin and Eran (2000) to find out the relationship between FDI flows to Chinese provinces and selected provincial characteristics. The study is the FDI in a province and its effects on FDI in nearby provinces. The method by which the studies conducted is spatial autocorrelation model and regression model. The studies established that the increased FDI in a province has positive effects on FDI in nearby provinces.

Foreign direct investments in any particular country specifically increase the production of good and servicers. The increase in production helps country to improve its balance of trade by exporting goods and services. Foreign direct investment in a country increase productivity of the firms. The study of Aitken and Ann (1999) is to find out the effects of Foreign Investment on Productivity and the effect of foreign equity participation and the plant productivity. By using regression analysis the studies resulted two effects, first, we find that increases in foreign equity participation are correlated with increases in productivity for recipient plants with less than 50 employees, Second we find that increases in foreign ownership negatively affect the productivity of wholly domestically owned firms in the same industry.

In the developing countries the surplus needs for goods and services it can be fulfill by imports or either can be fulfill by producing more. For producing more countries consider the foreign investment is one of the most important tools. The study Balasubramanyam, et.al (1996) investigated, within a new growth theory framework, the role which FDI plays in the growth process in the context of developing countries characterized by differing trade policy regimes. By using several variables in regression analysis studies revealed that the volume and efficacy of incoming FDI will vary according to whether a country is following the export promoting (EP) or the import substituting.

There are various components to improve employment by attracting foreign direct investment. The fundamental component including infrastructure, literacy rate, labor wages, costal location etc. The study Broadma and Xiaolun (1997) explained to analyze the geographical and sectoral distribution that China has evidenced in FDI inflows since reform began in 1978. The core study is to analyze the FDI with respect to GNP, Wage, Infrastructure, Illiteracy, and Coastal Location. The methodology is regression analysis. The study resulted that that FDI's geographical distribution in determined mostly by GNP, infrastructure, level of general education, and coastal location.


Lane, Philip R et.al (2003)."International Financial Integration", IMF Staff Papers, Vol. 50, IMF Third Annual Research Conference (2003), pp. 82-113

Alfaro, L. and Charlton, A., (2007). "Growth and the Quality of Foreign Direct Investment: Is All FDI Equal". Working Paper prepared for the IMF New Perspectives on Financial Globalization Conference, April.

Blomstrom, Magnus et.al (1997), "Foreign Direct Investment and Employment: Home Country Experience in the United States and Sweden", Economic Journal, vol. 107, pp. 1787-1797.

Lim, E. G., (2001), "Determinants of, and the Relation Between, FDI and Growth. A Summary of the Recent Literature". IMF Working Paper WP/01/175.

Freeman R. (1995), "Are Your Wages Set in Beijing?" Journal of Economic Perspectives,vol. 9, pp. 15-32.

Buffie, Edward F, (1993). "Direct Foreign Investment, Crowding Out, and Underemployment in the Dualistic Economy". Oxford Economic Papers, New Series, Vol. 45, No. 4 (Oct., 1993), pp. 639-667

Coughlin, Cletus C et.al (2000), "Foreign Direct Investment in China: A Spatial Econometric Study", The World Economy, 23(1), pp. 1-23.

Aitken, Brian J and Harrison, Ann E (1999). "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela. American Economic Review 89 (3), pp. 605-618.

Balasubramanyam, V et.al (1996). "Foreign Direct Investment and Growth in EP and is Countries" Economic Journal, 106, pp. 92-105.

Brodman, Harry.G and Xiaolun. Sun (1997), "The Distribution of Foreign Direct Investment in China", The World Economy 20, No. 3, pp. 339-361.

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