THE EFFECTS OF OUTWARD FDI ON DOMESTIC EMPLOYMENT Cesare Imbriani 1 , Filippo Reganati 2 , Rosanna Pittiglio 3 1 University of Roma “La Sapienza”, P.le Aldo Moro, 5; 00100 Roma, Italy, e-mail: cesare.imbriani@uniroma1.it 2, 3 University of Foggia, L.go Papa Giovanni Paolo II, 1; 71100 Foggia, Italy, e-mail: 2 f.reganati@unifg.it; 3 r.pittiglio@unifg.it Abstract. One of the channels through which home jobs may be affected by the increased degree of economic in- tegration in the EU-25 is through the employment (re)-allocation choices of multinational enterprises. Using data on Italian multinationals, this paper examines the impact of Italian outward FDI on local employment between 2001 and 2005. The authors found some evidence of a complementary relationship between parent firm employ- ment and affiliate employment located in Central and Eastern countries. They found no statistically significant ef- fect of a reduction in wages on parent employment of affiliates located in “old” European Union members’. Keywords: multinational enterprises, foreign and domestic employment. 1. Introduction 1 There are concerns that firms opening new for- eign subsidiaries also transfer jobs abroad. Between 1985 and 1997 Italian manufacturing firms created 360,000 new foreign jobs and lost 350.000 domestic jobs. Is there any relation between these two trends? Are foreign jobs created at the expense of domestic ones? This paper addresses these questions by analys- ing trends in foreign and domestic employment for a sample of Italian multinationals between 2001 and 2005. Which are the factors that might affect the nature of the relationship between domestic and foreign em- ployment? The general idea that the relationship is one of substitution derives from straightforward rea- soning. If a firm invests to save labour costs, it will substitute expensive domestic labour for cheap for- eign labour. If it invests to enter a foreign market it will be likely to stop exporting to that market and domestic employment will fall along with domestic output. There are however also good arguments sup- porting a relationship of complementarity that may offset this expected loss of domestic jobs. Foreign ac- tivities may require more headquarters personnel; re- ductions in production costs because of cheap labour or the exploitation of scale economies make MNEs 1 ∗ This work was jointly conceived and produced by the three au- thors. However, sections 1 and 6 were written by Cesare Imbriani, sections 2 and 4 by Filippo Reganati and sections 3 and 5 by Rosanna Pittiglio. more competitive and their domestic output and em- ployment may rise; if sales of the foreign subsidiary complement exports (e.g. by extending the product range), then parent output and employment will also increase. In substance there are two channels at work. The first one (labour intensity effect) is that for given domestic output foreign investments affect the labour intensity of production, the number of employees per unit of output. The second one (output effect) that for given labour intensity foreign investments affect do- mestic output and thus domestic employment. The question, though, is broader. It is not just how foreign and domestic employment are related, but also what would have happened to domestic em- ployment of MNEs had they not invested abroad. Even though we may observe that domestic jobs are replaced by foreign ones, this loss could have been greater with no foreign investments. From this per- spective, this paper carries out a counterfactual analy- sis: it uses firm level data to look at the links between home and foreign employment of a sample of Italian MNEs, also taking also account how the domestic demand for labour would have changed if these firms had not invested abroad. As the 'right' counterfactual does not exist (we cannot observe what would happen to firms as a consequence of what they have not done), we proxy it with a sample of non investing na- tional firms. As far as we know, this is the first work that makes use of this counterfactual analysis for out- ward investments. As an increasing number of firms expand opera- tions abroad, there are many fears that domestic jobs 527