ChainWhat it assumes · how to break it
Start
A multinational car or electronics maker opens a new assembly plant in a developing economy such as Vietnam.
1
As a result, the multinational hires local workers directly to build and staff the plant, since labour is a derived demand.
derived demand
derived demand
Assumes: The multinational recruits locally rather than bringing in its own staff.
But: Managerial and technical posts are often filled by expatriates, and a highly automated plant may employ few workers.
2
In addition, local firms that supply components, food, transport and cleaning to the plant win orders and take on more staff.
backward linkages
backward linkages
Best link to attack
Assumes: The multinational buys its inputs from local suppliers.
Assumes: The multinational buys its inputs from local suppliers.
But: Many plants import most components and only assemble them in the host country, so few supplier jobs are created.
3
Consequently, the wages earned by these workers are spent in the local economy, raising AD and creating further jobs in shops and services.
multiplier · aggregate demand
multiplier · aggregate demand
Assumes: Most of the extra income is spent on locally produced goods.
But: If much of it is spent on imported goods, leakages are high and the multiplier is small.
4
Therefore, workers move out of subsistence farming and the informal sector into formal paid jobs, so unemployment and underemployment fall.
underemployment · informal sector
underemployment · informal sector
Assumes: The new jobs go to people who were unemployed or underemployed.
But: The plant may recruit workers already employed by local firms, or drive local competitors out of business, so the net gain in jobs is smaller.
End
Employment rises, directly in the plant and indirectly through local suppliers and the multiplier.
Evaluation chain
- E1However, the number of jobs created depends on how far the multinational buys its inputs from local firms.
- E2If the plant is an assembly operation that imports most of its components, few orders reach local suppliers.
- E3As a result, the employment gain is limited to the plant itself, and the multiplier is weakened because much of the spending goes abroad.
- E4So FDI raises employment by much less than the headline investment suggests unless the government insists on, or encourages, local sourcing.
Another way to attack it: Multinationals are footloose. If wages rise or a cheaper location appears, the plant may close and the jobs, including those in local suppliers, disappear.
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Questions this answers
- Assess the likely impact of inward FDI on employment in a developing economy.
- Discuss whether multinationals benefit the workers of the countries they invest in.
- Explain how an increase in foreign direct investment could reduce unemployment.
Diagram
AD/AS: AD shifts right as investment rises, real output rises and so does the derived demand for labour. Alternatively a labour market diagram with demand for labour shifting right.
Reverse and related
Multinational closes its plant and relocates → direct and supplier jobs lost, and the negative multiplier reduces employment further.