Make America Great Again became the clarion call of the Trump era, with all of his policies designed to benefit the United States above all else. It created a distinct sense of isolation as Trump stepped back from various global initiatives on climate change, security, and global health. It’s a degree of inward-focused activity that has spread its wings during a Covid pandemic in which governments have become tempted to curb overseas activity so that all resources could be focused at home.
Alas, as new research from the London School of Economics illustrates, such an approach may actually harm domestic prospects. The authors argue that overseas direct investments typically have a positive impact on domestic employment, especially in areas such as the services sector and in high-tech manufacturing.
Global contraction
With the pandemic exacerbated by international travel, it has had the unintended result of raising skepticism about global economic integration as countries have been encouraged to look after themselves before others.
The research examines the connection between outward foreign direct investment (FDI) and domestic employment, including any regional disparities that might emerge. Three key findings emerged from the study.
Firstly, on an aggregate level, there is a clearly positive effect of outward FDI on local employment. Indeed, the data suggest that all parts of the United States would be better off if they were able to fully capitalize on the outward investments of local multinationals.
Secondly, the data suggests that areas that are not at the forefront of their country’s economic prowess tend to benefit more from any international expansion by local companies. This is particularly important given the widely stated desire of many politicians to even out the benefits of globalization and “level up” their economies.
Lastly, the data suggests that certain industries were much better at ensuring that domestic employment benefited from outward FDI than others. For instance, both high-tech services and high-tech manufacturing were found to deliver outsized benefits to local employment, with once again this effect especially pronounced in less developed regions.
Potential inequalities
While this promises to help policymakers with their “leveling up” agenda, the fact that many of the gains are concentrated in these most dynamic sectors may result in employment being concentrated in those sectors, to the detriment of less sophisticated industries. This is especially problematic as the high-skilled nature of these sectors will act as a honeypot for the relatively few highly-skilled individuals in these areas, with the gains concentrated there rather than spread more widely.
What’s more, there was also a distinct difference in the kind of activities pursued by firms in less developed regions. For instance, firms from leading economic areas tended to invest in innovation-related activities, whereas those from less-developed areas tended to pursue production opportunities instead.
As such, while less-developed regions do tend to benefit more from outward FDI from their high-tech firms, these benefits tend to emerge in more traditional, production-based functions rather than innovation and R&D-based functions.
Enthusiastic investors
Differences also emerged in the types of firms who tend to invest abroad, with these differences broadly correlated along developed and less-developed lines. For instance, whereas in leading economic areas, a wide cross-section of firms would invest overseas, in less-developed areas, any investments would be concentrated in a few firms. This appears to be the case across nearly all industries.
As such, the benefits that emerge from FDI in these less developed regions are highly dependent on these small number of firms, who tend to pursue relatively low value-added activities overseas. The concentration of influence among a small number of firms might also encourage them to seek particular favors from local politicians as part of their wider economic development plans.
Overall though, it would be far less advisable for policymakers to try and limit outward FDI in the mistaken belief that doing so will protect jobs domestically. The evidence seems to suggest quite the opposite is actually the case.
