Since the beginning of the nineties, Austria has become as one of the most important foreign direct investors in Central and Eastern European Countries (CEEC)1. Employment in Austrian affiliates located in the East and Central European countries (CEEC) increased from 50.000 to 233.000 in the period 1993 to 2003. In 2003, the employment share of foreign affiliates of Austrian multinationals in the CEEC as a share of total foreign employment was about 71%, which is the highest share in the OECD area.
While outward FDI has given an important drive to the internationalisation process of the Austrian firms from which many positive impulses to the Austrian economy have been supported empirically, the strong foreign involvement of Austrian firms has also given rise to fears that the relocation of labour intensive production to low-wage countries would “export jobs” and reduce employment at home. From theory as well as from many empirical studies on FDI we know that much of the effects on the home economy depend on the type of FDI. While positive effects can be expected from horizontal FDI, the impact of vertical FDI is not clear a priori (Becker – Jäckle – Mündler, 2005). Vertical FDI may lead to exports from the parent company to its foreign affiliates, increase productivity and international competitiveness but still substitute employment at home.
Following Pfaffermayr (2001) we re-estimate relative labour demand for Austria (employment in Austrian foreign affiliates relative to employment at home) for the period 1994-2003 as a function of relative wages, relative productivity, foreign demand, and other explanatory variables. However, apart from analysing a different period of time, our analysis extends prior work of Pfaffermayr (2001) in a number of ways. First, we perform separate estimations for the manufacturing and the services sector and in that way are able to single out important differences in the results as to the direct investing sectors.
Second, to test for the robustness of our findings, we estimate two other specifications explaining the level of domestic employment rather than the ratio between foreign and domestic employment. Thirdly, as data availability at the individual partner country and sectoral level is limited to the ten most important Austrian FDI locations for reasons of secrecy, we further cross-check the results by re-estimating all specifications at the regional level (aggregating country level information) with increased data-availability at the sectoral level.
The empirical specification is derived from theoretical models of international trade which explicitly model internationalisation through FDI (as a substitute or as a complement to exports). Income and employment effects of FDI to a large part depend on the specific type of the relationship between FDI and exports. Relocation of production to low cost locations may substitute exports and thereby put downward pressure on wages or lead to unemployment as well as changes in the structure of labour demand and the income distribution (skilled vs. unskilled employees). On the other hand, FDI can generate additional exports of the parent company (for instance of inputs for foreign production of the affiliates, or due to investments in distribution networks, service functions or marketing). Relocation of production processes from Austria to East and Central Europe (outsourcing) can increase the competitiveness of the end product and thereby secure existing jobs or create additional jobs.
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