What are the local effects of foreign direct investment on employment in developing countries? This column assesses the recent experience of Mozambique, when a major natural resource discovery led to a large inflow of foreign capital, and the creation of thousands of jobs in a wide array of sectors across the country. The lessons are that oil discoveries can lead to simultaneous investment in various sectors including manufacturing, providing the opportunity for a growth take-off. This is something policy-makers should consider when managing unexpected resource booms, especially since the development potential of foreign capital is mostly associated with flows into manufacturing and services rather than extractive industries.
Foreign direct investment (FDI) has long been considered a key part of economic development. It is associated with transfers of technology, skills, higher wages, and linkages with local firms. But it is still not clear whether FDI creates more jobs than it destroys. Indeed, foreign firms may generate less employment than local firms, as they tend to be more productive and more skill-intensive.
Previous studies find few or no positive effects of FDI on employment across European countries or US states. One study even suggests that the entry of foreign supermarkets into Mexico had no effect on average employment at the municipality level. This is surprising as we would expect FDI projects to be associated with a local multiplier—that is, the idea that every time a local economy generates a new job by attracting a new business, additional jobs might also be created.
Hence we think it is a worthy endeavor to check whether recent FDI booms in developing countries have been job-creating or not.
We explore the case of Mozambique, which recently experienced an unprecedented FDI bonanza. In late 2009, there was much fanfare around news of large natural gas discoveries off its coast—estimated to be worth around 50 times the country’s GDP. The country now had an incredible opportunity to grow out of poverty.
Foreign firms moved in right after the first discovery in a multitude of industries, directly creating around 10,000 jobs in the following three years across the country. In 2014 alone, Mozambique attracted $9 billion worth of FDI and almost 15% of all the FDI jobs created in sub-Saharan Africa (see Figure 1).
Figure 1: New FDI jobs in Mozambique
Note: The dashed red line indicates the first giant gas discovery in 2009.
Our analysis suggests that none of this would have happened without the gas discovery. On average, across developing countries we find that that in the two years following a large oil or gas discovery, FDI inflows that are not related to the extraction of oil or gas increase by 58%.
This is because giant discoveries act as news shocks about future income and therefore drive the investment cycle. Discovery countries are thus inundated with foreign capital, much like boomtowns during a gold rush. Ethiopia, Ghana, and Tanzania—the only other sub-Saharan African countries that have experienced a first giant discovery since 2003—also experienced FDI bonanzas.
This huge FDI shock was diverse both across sectors—such as manufacturing, retail, business services, and construction—and across localities (see Figure 2). It also allows us to estimate the job-creation effects of FDI projects across Mozambique.
Since FDI and local employment vary across districts, sectors, and years, we can estimate the extent to which local employment increases when a specific sector in a particular town experiences an FDI job boom, and compare it with job creation in other sectors in the same location, as well as job creation in the same sector but in other locations. This variation also allows us to examine all the other macroeconomic forces unleashed by the gas discovery, such as exchange rate movements, inflation, or changes in public debt.
Figure 2: FDI firms across Mozambique districts
Source: Mozambique firm census 2014 (CEMPRE)
In our context, FDI jobs may have a multiplier effect via two distinct channels:
- First, the newly created FDI jobs may offer higher salaries, increasing local income and in turn, demand for local goods and services. Such an increase in demand will be met by local firms by adjusting production, creating more jobs, and reinforcing the initial increase in demand.
- Second, backward and forward linkages between multinationals and local firms might increase the demand for local goods and services.
Our estimates suggest that for each new FDI job, an extra 6.2 jobs are created in the same sector in the same district. Since 131,486 jobs were directly associated with FDI firms in 2014, we can infer that almost 1 million jobs, out of around 9.5 million total jobs in Mozambique, are the result of the FDI multiplier.
Our results suggest that around 55% of the extra jobs created are informal rather than formal, and that around 65% are women’s jobs rather than men's. What’s more, it is only workers with at least secondary education who benefit from this wave of job creation.
While attracting FDI, notably via investment promotion agencies, has been a policy objective in many developing countries for decades, little attention had been paid to the local employment effects of FDI projects. The experience of Mozambique indicates that FDI projects may be associated with a large local multiplier.
In other words, FDI projects may have employment effects across the whole local economy, and beyond the direct job creation on which economists usually focus. Thus, our work not only confirms that investment promotion may be a beneficial development policy but it also has implications for regional development policies in developing countries.
The results also suggest that oil discoveries can lead to simultaneous investment in various sectors including manufacturing, possibly diversifying economies and providing the opportunity for a growth take-off. This is something policy-makers should consider when managing unexpected resource booms, especially since the development potential of FDI is mostly associated with quality FDI in manufacturing and services rather than in extractive industries.
Pierre-Louis Vézina is Lecturer (Assistant Professor) in Economics at King’s College London. His research interests include using natural experiments and novel datasets to get a better grasp of policy issues in trade, development, migration and corruption.
Gerhard Toews is Assistant Professor of Economics at the New Economic School in Moscow. His research interests include natural resources and energy economics, labor economics, international economics, political economy and economic growth.