Effects of Outbound Investment on Domestic Employment

One of the great debates about globalization has been whether it helps or hurts domestic employment. People my age and a bit younger no doubt remember the debate over the North American Free Trade Agreement (NAFTA) in the 1992 election, where independent candidate Ross Perot referred to the “giant sucking sound” of jobs leaving the United States and going to Mexico.

That same debate comes up every time a trade agreement is being considered, and it returned with force during the Trump administration and has continued to be an issue in the Biden administration. The political spin is a bit different—Trump railed against companies moving plants to other countries, while Biden talks about the importance of “reshoring” (bringing those plants back to the United States)— but whether framed negatively or positively, the point is the same.

Currently, the argument that outbound investment is bad has also gotten a boost from the security concerns surrounding China. The argument is that investment in China is bad not only because it costs U.S. jobs, but because it transfers critical technology to China and undermines our security. Congress is considering the creation of a review process for outbound investment in the conference over the House and Senate China bills, something I have frequently said is a bad idea. If you listen to the proponents’ rhetoric, you will notice differences. Some emphasize only security and argue the review process should only look at a small universe of investments that would hurt our security, but others make the larger argument that economic security is also important and hint that the real purpose of review is to discourage jobs from leaving the country, period.

Security is an important issue. I dealt with it before and no doubt will again, but this time I want to look at the underlying economic issue—does outbound investment in fact result in declines in domestic employment? As noted above, that is not a new question. When I was working on Capitol Hill, I used to run into the issue in conversations with colleagues from organized labor, who were absolutely convinced that investment is zero-sum. A dollar invested overseas is a dollar not invested in the United States. A job created overseas is a job lost in the United States.

Past research has suggested that is a simplistic view that does not stand up to scrutiny across the board. Anecdotally, there have been cases where new production outside the United States is clearly linked to a reduction in domestic employment, but there have also been cases where the cost reductions created by the productivity and competitiveness gains at home that led to higher production, greater market share, and increased employment. Increased U.S. employment can also occur when the United States is the source of the parts and components used in the foreign factory, and the resulting increased foreign sales have a positive employment impact in the United States. In addition, technology transfer in high-tech sectors can lead to a back flow of technology to the home country, which leads to added employment.

Recently, a new publication has shed some additional light on this issue with respect to “greenfield” investment, which is the creation of new facilities rather than simply the acquisition of existing ones. The article, titled “Does foreign investment hurt job creation at home? The geography of outward FDI and employment in the USA” by Riccardo Crescenzi, Roberto Ganau, and Michael Storper, appeared in the 2022 edition of the Journal of Economic Geography.

Their conclusion, in short, was that it’s complicated, but at the macro level, their research suggests:

That outward ‘greenfield’ FDI [foreign direct investment] does not generate a net aggregate regional-scale substitution effect between domestic and foreign employment. The local labor market in the average home region appears to benefit from outward FDI of its local companies. . . . Multinational companies use FDI as a channel to grow both in the international market—for example, by gaining from location advantages related to inputs, proximity to final markets or new knowledge—and domestically—for example, by deploying new knowledge and technologies acquired abroad, and possibly thereby increasing scale. These advantages seem to outweigh possible employment losses due to offshoring of supply chains.

There are, however, two footnotes. One is that while there is an overall positive effect, it is not uniform across all industries, but appears greatest in high-tech manufacturing and services because “foreign activities are more likely to be complementary to domestic activities and more receptive to ‘import’ new complementary non-redundant knowledge from foreign affiliates.” The other is that the positive employment effects seem to be greater in lesser developed regions, and by disproportionately benefiting higher-skilled workers, it may contribute to inequality.

The study acknowledges its own limitations—it looked only at greenfield investment and analyzed results only over the short term—but it is nonetheless an important contribution to the literature on this difficult subject. And it is certainly welcome, as the debate has for decades been plagued by multinational companies and many economists arguing that global investment is an unalloyed good and by various progressive activists arguing that it is zero-sum and therefore inevitably bad. The truth, as is so often the case, appears to be somewhere in between, and wise policymakers would do well to take the complexities into account when deciding what, if any, action to take.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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