The Local Effects of Foreign Direct Investment

Governments around the world compete to attract foreign direct investments (FDI) on the presumption that foreign firms will contribute to improve local wellbeing. Yet, the empirical literature on the effects of FDI is mixed and there is a lack of systematic evidence covering a broader set of development-related outcomes. The objective of this project is to understand whether and how the entry of foreign investors performing different business activities (e.g. production vs business services; construction vs. trade; extraction vs. R&D) affects local labour markets and living conditions of individuals around the project's location.

The project will rely on the construction of a new dataset collecting geolocalised microdata on a sample of African countries for which individual survey data are available starting from 2003. The new dataset will be constructed by combining FDI information from fDiMarkets with individual data from Population censuses and the Demographic and Health Surveys (DHS). The entry of an FDI project will be used to explain cross-location differences in labour market outcomes, including in particular the shift in their sectoral composition (structural transformation). Additional outcomes include socio-economic characteristics of respondents and their family members, as well as indicators of domestic firms’ performance. Individuals' data will be systematically disaggregated by gender.

This project responds to the need to bring more granular evidence on the impact of FDI in developing countries. Bringing the analysis down at the individual level and looking at the local effects of FDI can provide new insights to the literature, which has so far been largely looking at the economic effects of FDI (either at the macro or at the firm level). Moreover, by exploiting variation in the specific business activity performed by foreign investors we can provide a comparative overview on the differential effects of attracting different types of FDI. This overview can better inform policy makers and investment promotion agencies to target the entry of some specific types of investors. This is deemed particularly relevant for resource constrained developing countries, whose reliance on external flows is crucial to support private sector and broader development goals.



Marco Sanfilippo

University of Turin