The findings are important for governments competing to attract international investors. They suggest that offering tax incentives or other investment benefits alone may not be enough to reduce unemployment. The quality of institutions and the structure of the economy can determine whether foreign investment produces broad employment opportunities.
Why Foreign Investment Does Not Always Create Jobs
FDI has long been viewed as an important source of economic development. Foreign companies can bring capital, technology, management expertise, productivity improvements, export opportunities, and connections to international markets. For developing economies, these benefits can support industrial expansion and economic integration.
However, the relationship between FDI and employment is not always straightforward. A foreign investment project can increase production without creating a large number of jobs when it relies heavily on machinery, automation, or advanced technology.
Technology-intensive industries may require highly skilled workers while creating relatively few positions for workers with lower or intermediate levels of education. Foreign investment can also increase productivity, meaning companies may produce more goods without proportionally increasing their workforce.
This explains why previous evidence on FDI and employment has been mixed. Some studies associate foreign investment with job creation through industrial expansion and export-oriented production, while others identify possible employment displacement in particular sectors.
Nugroho and Subiyantoro place particular emphasis on institutional quality. Transparent regulations, efficient government institutions, regulatory predictability, and credible policies can make it easier for economies to convert foreign investment into sustainable employment.
Study Covers 10 Economies Over 15 Years
The research analyzed annual data from China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam over the 2010–2024 period.
The researchers collected information from major international databases, including the World Bank, International Monetary Fund (IMF), UNCTAD, International Labour Organization (ILO), and World Governance Indicators.
The main variables were the unemployment rate and FDI inflows as a percentage of GDP. The analysis also considered economic growth, inflation, interest rates, exchange rates, regulatory quality, government expenditure, and net exports.
The researchers compared different statistical models to account for differences among countries. Their model selection led them to use a Fixed Effects Model, which allows each country to have characteristics that are specific to its own economic and institutional conditions. The dataset contained 150 observations, covering 10 countries over 15 years.
FDI Is Associated With Lower Unemployment
The central finding is that higher FDI inflows are associated with lower unemployment. The authors report a negative relationship between foreign investment and unemployment, supporting the idea that foreign investment can increase demand for labor through expanded economic activity.
The regression results presented in the article show an estimated coefficient of -3.769813 for the predicted FDI variable in the unemployment model, with a reported probability value of 0.072. This indicates a negative relationship at the 10 percent significance level, although it does not meet the conventional 5 percent threshold.
The effect also varies substantially across economies.
- Vietnam, Indonesia, and Malaysia show stronger employment effects from FDI, particularly because foreign investment is linked to labor-intensive manufacturing.
- Japan, South Korea, and Singapore show weaker employment effects because their FDI is more concentrated in technology-intensive sectors requiring highly skilled labor.
The contrast demonstrates that the amount of foreign investment entering a country is only part of the employment equation.
Governance Can Turn Investment Into Jobs
One of the study's most important conclusions is that institutional quality strengthens the employment impact of FDI. Countries with transparent regulations, efficient bureaucracy, credible policies, and stronger governance are better positioned to translate investment inflows into employment opportunities.
In an ethical paraphrase of the authors' argument, Yan Ari Nugroho and Heru Subiyantoro of Universitas Borobudur emphasize that FDI should not be viewed as automatically creating employment. Its labor-market impact depends on the institutional environment in which investment takes place. Economies with stronger governance and greater capacity to absorb investment are more capable of turning foreign capital into sustainable employment.
Implications for Governments and Businesses
The findings provide several implications for policymakers seeking employment-generating investment.
Governments should prioritize regulatory certainty, governance reform, workforce development, and industrial upgrading rather than relying solely on short-term investment incentives. The researchers argue that regulatory credibility and policy consistency can be more important for sustainable employment outcomes than incentives alone.
Workforce development is also critical. Countries that want to benefit from technology-intensive FDI need workers with skills that match the requirements of modern industries. At the same time, industrial policies can encourage investment in sectors capable of creating substantial employment while adapting to technological change.
For businesses, a stable regulatory environment can provide greater certainty for long-term investment decisions. For workers, the findings highlight the importance of skills development so that domestic labor can participate in higher-value activities created by foreign investment.
The study ultimately argues that ASEAN and East Asian economies should measure investment success not simply by how much foreign capital they attract, but by how effectively that capital contributes to inclusive economic development and sustainable employment.
Author Profile
Yan Ari Nugroho is affiliated with Universitas Borobudur, Indonesia, and serves as the corresponding author of the article. His research in this paper focuses on foreign direct investment, unemployment, institutional quality, and governance in ASEAN and East Asian economies.
Heru Subiyantoro is also affiliated with Universitas Borobudur, Indonesia and is a co-author of the study on FDI and unemployment.
Note: The journal article does not state the authors' academic degrees or provide detailed individual biographies.
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