The employment spillover of foreign direct investment and host country productivity

Abstract

This study uses panel data to advance international business literature about the efficiency with which Foreign Direct Investment (FDI) inflows to developed countries create employment compared to developing countries. It is argued that the economic activity of a host economy in the growth of its Gross Domestic Product (GDP) facilitates its ability to attract FDI. The importance of this relationship lies in the components that make the GDP a composite measure and has wide-ranging implications on governance, effectiveness and efficiency of a host country. The analysis of data confirmed the hypothesis on the efficiency of developed economies in creating employment from FDI inflows. The study further presents a detailed case, analysed from data, on the relationship between economic activities of major industrial sectors in South Africa and their ability to attract foreign investments. Furthermore, the extent to which the foreign investment creates employment in proportion to the FDI inflow is examined. The study findings support a positive relationship with GDP – FDI and employment. While similar trends were seen on industrial sectors, a declining growth in employment and FDI inflow were noticeable in South Africa.