Abstract

This paper examines the FDI-unemployment nexus in OECD countries from both theoretical and empirical perspectives. We first build a search and matching model which accounts for inward and outward FDI capital stocks and identifies key channels through which FDI affects unemployment. In a subsequent empirical panel ARDL estimation, we show that both inward and outward FDI can reduce unemployment conditional on technological and institutional factors. Inward FDI is most unemployment-reducing in less innovative and less technologically advanced countries, while for outward FDI this is the case in technologically more advanced countries with sufficient absorptive capacity and stronger bargaining institutions. For inward (outward) FDI, the technology diffusion (reverse spillover and head-office) channel dominates these long run effects. Our findings imply that policies which strengthen absorptive capacity, diffusion, and domestic linkages can make FDI more employment-friendly, whereas in advanced economies the composition and integration of FDI may matter more than broad FDI-attraction alone.