Foreign direct investment and employment in Central Europe

This article investigates the effects of foreign direct investment on employment generation in Central Europe. Foreign affiliates operate as a buffer to reductions in overall employment and show significant cross-country differences. A model analyzing the contribution of foreign direct investment to restructuring is developed. This model helps interpret the empirical evidence on the link between foreign direct investment and employment in Central Europe. Increasing differentiation in employment between manufacturing industries dominated by foreign affiliates suggests the importance of diversified sources of foreign direct investment for employment generation and preservation. A disaggregate analysis indeed reveals a much more complex and differentiated role of foreign direct investment in employment preservation, employment generation and structural change than the aggregate picture would suggest. This diversity has important policy implications for attracting and upgrading foreign direct investment.