Do credit constraints reduce foreign jobs? A note on foreign direct employment

Abstract

This article studies the effect of credit constraints on the jobs created by multinational enterprises in host countries. Although most FDI is labour intensive, few studies delve into the determinants of foreign direct employment (FDE). This article constructs a model of limited commitment between the financed and financing parties to explain how FDE is affected by financial frictions. Moreover, this study examines FDE’s determinants empirically on a global data set including FDE data from 161 countries during 2003–2010 by means of the gravity equation. Results show that credit constraints during the Great Recession roughly halved FDE, tripling the effect on FDI and suggesting that domestic jobs slightly outpaced foreign jobs.

Keywords:

• foreign employment
• gravity equation
• banking crises
• Great Recession
• FDI

JEL Classification:

• F20
• F21
• F23

Notes

¹ See Laeven (2011), Gil-Pareja et al. (2013) and Gómez-Plana and Latorre (2014) for an overview.

² Gil-Pareja et al. (2013) calculate a reduction of 30% in new greenfield projects due to banking crises.