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Foreign Direct Investment Role in Unemployment Essay


Executive Summary

In the modern world, globalization is gradually gaining influence. While its volume and progression are already well-established, its impact on the economic, social, and political spheres of life is debatable. It is common to see indications that it disrupts regional business practices and undermines the carefully conceived economic stability of developing countries. However, a growing body of evidence suggests that the long-term net effect of globalization is actually beneficial for both sides of the process.

The following report explores the evidence behind the claims of both the advocates and the opponents of globalization and one of its prominent manifestations—foreign direct investment (FDI) to determine whether its effect could be used for a project aimed at decreasing unemployment rate on a local scale. Secondary research reveals two distinct approaches visible in the literature, both of which offer some useful methods and tools for the project. The first approach views globalization mostly as beneficial for overall redistribution of wealth but disruptive for countries with advanced economies. According to this viewpoint, FDI is undesirable since it introduces competition, which can be viewed as unfair. However, it also offers tools (e.g., education) that are equally applicable for projects that do not distance themselves from globalization. The second way of addressing unemployment associated with the expansion of global markets can be broadly described as utilizing globalization to leverage the current situation in favor of the job market. Its proponents usually view FDI as beneficial for the locale’s economic health and encourage policymakers to create a more welcoming environment for foreign investors. This approach offers insight on how to regulate the effect of FDI by utilizing available levers (e.g., policies).

Based on the findings, we were able to come up with a set of recommendations that offer the most improvements for the employment situation in our local community. First, the economic environment should be studied to identify tendencies and trends in the labor market and capture essential data. This step should include surveys and interviews that would improve understanding of the current shortcomings in education and training of employees and research exploring the dynamics of immigration and its impact on employment in the local community. At the same time, local businesses must be surveyed for readiness to implement the desired policy changes. Second, the obtained data must be studied to determine what fields present the biggest capacity for improving FDI favorability. Third, local businesses must be approached with the resulting model, which would allow them to assess the effects of FDI and adjust their practices accordingly.

Such a three-step project will ensure the involvement of local actors under the condition that they are presented with compelling evidence of benefits of the described actions. In addition, such an approach will create the possibility of taking indirect control of the positive effects of the FDI without turning away from the process of globalization. In other words, it will allow operating within the gradually globalizing economic environment and finding a balance between diversification and homogenization, both of which offer opportunities for economic improvement. Finally, its effects will likely be observable both in the short run (fostering trust of participants) and over a longer period (e.g., by promoting the need for better education after local businesses adjust wages to fairly compensate relevant problem-solving capabilities and critical skills). Given the dissatisfaction of the local community with the current state of the job market, it is also expected to see eager participation of its members, further raising the chances for the project’s success.

Introduction

In the modern world, globalization is gradually becoming a more influential phenomenon. While its volume and progression are already well-established, its impact on economic, social, and political spheres of life is debatable. For this reason, the net effect of globalization remains a controversial and rigorously debated issue among scholars. One of the aspects arguably responsible for a large portion of the controversy is globalization’s effect on employment. One common approach defines it as a disruptive factor for the employment market since it allegedly strips from the domestic workforce the possibility to compete with external actors on equal terms. A polar opposite of this approach is the notion that globalization is actually beneficial for the job market since it redistributes the offerings, creating a more homogenized and fair environment.

One of the consequences of globalization commonly used as an argument in favor of both claims is foreign direct investment (FDI)—a result of a worldwide integration of markets. Usually, FDI takes the form of a business entity establishing a company in another country or acquiring an existing one locally. Most of the time, FDI occurs between countries with sufficiently different technological levels and economic growth rates. Naturally, such conditions eventually lead to a gap in competition, which is cited by the critics of FDI as a reason behind the decline of the domestic economy and, by extension, the decrease in a job market. Conversely, the availability of cheap laborers from low-income countries supposedly creates unfair competition for domestic workers.

However, a growing body of evidence points to the fact that FDI also creates a better working environment and may, in fact, improve the employment rate along with spurring economic growth for the country. The most evident benefits emerge from improved export possibilities and the formation of new job opportunities. These factors, in turn, increase productivity and balance out competition in the long run. This effect has led several researchers to conclude that FDI is ultimately beneficial, resulting on some occasions in “decrease of 0.009% in unemployment and an increase of 1.219% in GDP” and to suggest policies promoting FDI and creating environments that increase international diversification of the markets (Shaari, Hussain, and Halim 4900). Admittedly, such a move is tempting in the light of the gradually worsening unemployment rate in our community. At the same time, the lack of definitive results and the ongoing controversy discourages policymakers from adopting similar strategies without proper safeguard measures. Besides, several variables, such as currency fluctuations, inflation, and political instability, make the predicted outcomes less certain.

The following report aims at researching the existing literature on the topic in an attempt to produce a set of meaningful recommendations that can be used to effectively utilize FDI as a tool for reducing unemployment. The secondary research attempts to isolate general views on FDI and its role in economic development and, by extension, the labor market by exploring available literature. The research allows us to define two approaches to dealing with effects of globalization. These approaches, applied to the needs and capabilities of a local community, provide us with necessary insights into the recommended course of actions, and highlight shortcomings and barriers that may arise during the course of project implementation.

Secondary Research

The review of the existing literature on the matter reveals two distinct approaches to handling the problem of unemployment associated with the expansion of global markets. The first approach views globalization mostly as beneficial for overall redistribution of wealth but disruptive for countries with advanced economies. Spence, for instance, describes it as responsible for the diversification of the job market in the United States, and focuses on interventions that reshape the internal conditions of the country to better fit the international setting (35). According to this viewpoint, the emergence of new players in the global market creates competition in areas that were previously dominated by several key actors (Spence 30). Since this approach clearly identifies globalization as undesirable, it usually suggests changes in policies and regulations that would offer advantages to the domestic workforce. For instance, since the most qualified and educated segment of workers sees an increased demand for their services, whereas those who are less competent are facing a decline in employment opportunities, it is natural to assume that educational reform is expected to eventually improve the chances of employment for entrants. Importantly, since the approach views FDI as undesirable, the suggested improvements in education are aimed primarily at the domestic workforce.

In other words, to prepare local community members for competition with immigrants, they propose to give the former the possibility of applying for more lucrative job offerings (which also offer a more attractive reward) by increasing their level of proficiency. Another common take on the problem of domestic unemployment is the alteration of economic conditions, such as taxation systems, which would remove extra financial burden from local businesses, create a milder environment and, by extension, increase the number of jobs. Again, the focus of specific changes suggested by advocates of this method is usually aimed at encouraging domestic functioning and preventing local firms from expanding overseas (Spence 36). As can be clearly seen, all of the proposed changes target specific domestic conditions, to adjust them to the setting created by globalization. While in our opinion it is unwise to follow the described methods directly, the approach above offers tools (e.g., education) that are equally applicable for projects that do not distance themselves from globalization.

The second way of addressing unemployment associated with the expansion of global markets can be broadly described as utilizing globalization to leverage the current situation in favor of the job market. Such an approach usually emphasizes the overall positive impact of globalization on the country’s economic health and encourages policymakers to create a more welcoming environment for foreign investors. For instance, a positive influence of the rate of foreign direct investment in Malaysia on the dynamics of unemployment (0.009% decrease in unemployment resulting from a 1% increase in FDI in the country) can be deemed a viable reason for changes in state policies that would boost the FDI of the country (Shaari, Hussain, and Halim 4905).

The core assumption here is that greater FDI would result in better opportunities for the local workforce. At the same time, the approach can lead to undesirable effects as it may widen the wage gap and create additional pressure for local business entities (Shaari, Hussain, and Halim 4905). Assuming that the findings are interpreted correctly, and downplaying the possible deviations created by unaccounted factors, we may characterize these suggestions as an attempt to view FDI as an intricate yet useful tool for regulating the unemployment rate. In simpler terms, this is an attempt to assess the effect of the outbound factor (FDI) on the inbound issue (unemployment) and regulate its magnitude by utilizing available levers (policies). What unites it with the previously discussed approach is the intention to administer a certain level of control and minimize unpredictability.

Finally, instead of viewing the issue from the perspective of a specific country, it is possible to evaluate the effect of FDI on unemployment by using the net-FDI concept, or the difference between the inward and outward FDI (Schmerer 41). Such approach allows to account for the effect both in the domestic and in the international markets, creating a more uniform and objective overview. Moreover, there seems to be a robust relation between net FDI and lower rates of aggregate unemployment (Schmerer 51). This leads us to the conclusion that it is possible to regulate unemployment by controlling the FDI. Schmerer suggests a simple multi-industry model with search frictions in the labor market that offers an additional level of control and adjustment in introducing institutional policies (46).

For instance, milder FDI policies (suggested by Shaari, Hussain, and Halim) will likely create inequality (pointed out by Spence). Thus, a more multi-faceted approach to policymaking is desirable to evade possible adverse effects. Besides outlining the benefits of using the model to regulate the process directly, we may predict several secondary benefits of the intervention. Specifically such change would offer additional opportunities for studying the effect of heterogeneous labor markets and outsourcing without taking risks associated with them. Besides, the suggested model can supposedly serve as a tool for balancing the existing discrepancies in wages and, by extension, increase the attractiveness of the majority of job offerings. It is important to stress that while the suggested model allegedly applies to both sides of the issue, it is ultimately consistent with the second approach, i.e., using the effects of globalization to influence the undesired effect, and thus can complement it.

Recommendations

The overview of the approaches allows us to create several possible projects meant to reduce employment on a local scale. The most intuitive is an overarching effort aimed at improving the domestic labor market conditions. Such a project must be comprised of several smaller events targeting specific areas responsible for the current shortcomings in the area. The most evident one is the education sphere, since its current state is positively associated with the decline in the mean competence of the workforce. Admittedly, the possibility of influencing the educational system is limited by federal- and state-imposed regulations, visibly limiting the opportunity to introduce changes locally. Thus, the community must establish reliable communication channels with employers and educators to improve understanding of the expectations of the former and synchronize the obtained information with the actions of the latter.

For instance, a community can create a committee that would reach out to the local owners of businesses and conduct surveys and interviews. The information obtained from these can be used to understand what expectations of employers are currently unfulfilled and how they see applicants for the jobs they offer. This information can then be presented to the local school district administration in an attempt to define which of these expectations can be fulfilled by changes in school curriculum (e.g., the reported inability of new employees to think outside of the box can be amended by adjusting the curriculum to emphasize critical thinking skills and develop problem-solving abilities. Simultaneously, the economic environment must be synchronized with the needs and possibilities of the local community. Specifically, partnerships can be fostered with local businesses to create more of a fair and fitting environment for the domestic workforce.

One way of achieving this would be to suggest a closer collaboration between educational institutions and potential places of employment, where, for example, enterprises offer an opportunity for high school students to participate in practicum projects organized by the companies. This would allow students to understand the requirements present at their desired places of occupation and highlight the challenges that await them. After successful participation in such projects, employers may award students certificates that can later be used to determine their relevant experience. Throughout the course of the project, the employers may also negotiate the conditions of later employment, securing in this way the return of employees. Simply put, the project is expected to create the conditions under which the negative impact of FDI is minimized and its positive influence retained.

However, it is important to recognize the limitations of such a project. First, the capability of the local community to adjust the economic environment is limited by larger factors such as taxation (Spence 36). Thus, it would be unreasonable to expect significant improvements in the short run, while the long-term effects of such intervention are difficult to predict with certainty. Finally, unlike the economic domain, the educational sphere does not demonstrate a clear outline of the desired direction of change, and the previous experience of moderately successful reforms suggests low chances of successful intervention.

Thus, another possibility to decrease unemployment is a project aimed at the factors responsible for the aforementioned long-term effect. In general terms, the goal of such a project would be to target the vertical hierarchy of responsible factors from the highest possible level. For instance, it may be useful to research the actual impact of FDI on a community and present the findings, along with suggestions for policy amendments, to state authorities. One way of doing this would be to explore the literature in search of evidence of FDI’s impact on businesses in communities that can be compared to ours. Then the report needs to present implications for parallels between the described setting and the situation in our community and suggest the adaptation of similar policies. If accepted, the changes will have a downward effect on particular areas, including the labor market.

For instance, immigrant workers are often cited as having trouble with language, which severely limits their value as workforce. The creation of an institution where they would be able to improve their knowledge of English will give them additional leverage in finding a better job and therefore stimulate the desire of immigrants to seek jobs in specific areas where such policies raise their chances for success. The net effect of milder FDI policies will eventually lead to economic improvements and facilitate changes on the local scale. In addition, such a project likely requires little time to execute but depends on too many uncertainties. First, it requires significant administrative support from the local authorities to approach higher levels of influence. Second, the suggested research demands financing and material resources currently unavailable in the community. Third, even if approved, the changes will likely require a long time to take full effect and longer still to result in any meaningful change in a particular locale. In other words, it offers a robust and steady progression toward a decrease in unemployment but is not effective as an immediate solution.

The third possibility is a project aimed at directly leveraging the effects of FDI by applying the trade model suggested by Schmerer scaled down to apply to the community. Such a project requires three steps. First, the local economic environment should be studied to identify tendencies and trends in the labor market, and capture essential rates important for model configuration. This step should include surveys and interviews that would improve understanding of the current shortcomings in education and training of employees described in the first alternative but should not stop there. A more encompassing research exploring the dynamics of immigration and its impact on local economic state and employment must be conducted.

The data can be obtained from state records and requested from federal sources by the committee. Simultaneously, local businesses must be surveyed for readiness to implement the desired policy changes. Today, many companies and small enterprises recognize the importance of change management and regularly conduct research that explores the success of implemented changes. Therefore, the committee can approach them with the request to share their experience and either disclose the results of their research or issue a statement based on it that describes the level of observed success. Such a request should be backed with a relevant explanation of the intended use of the data, details on ethical implications (e.g., proper confidentiality and anonymity), and a convincing description of the goals of the project backed by the benefits of its success. Second, the obtained data must be studied to determine what fields present the biggest capacity for improving FDI favorability. For example, the analysis could reveal that a perceived negative effect of rising numbers of immigrants on the availability of job offerings for local community members is over-exaggerated or simply wrong (e.g., the long-term effect of such a setting may display the increase in employment rates and the performance of the enterprise).

Third, local businesses must be approached with the resulting model, which would allow them to assess the effects of FDI and adjust their practices accordingly. To expand on the described hypothetical situation, business owners are presented with definitive evidence that excludes the possibility that hiring workers based on the criteria of citizenship improves their brand image or boosts the company’s performance. Coupled with the clear explanation behind the difference in perceived and actual results, they are more likely to accept the new model of operation and evaluation of their firm’s performance. Essentially, such an approach will create the possibility to take indirect control of the positive effects of the FDI, which supposedly unites it with the first project.

However, it differs in one important detail—it does not turn away from the process of globalization, which becomes more difficult each year. Instead, it introduces a means of coexisting with it and finding a balance between diversification and homogenization, both of which offer opportunities for economic improvement under the proper conditions. Admittedly, the research and design of the appropriate model require funding and skill. However, the effect of such intervention will be observable in the short run, which will strengthen the dedication by the involved community members. In the long run, such a project will also contribute to the overall development of the community. For instance, the rise of demand for a skilled workforce, backed by fair compensation, will create the need for better education, which may eventually create a self-sustaining cycle (Spence 38).

In addition, the project offers the necessary level of safety since it uses a means of control and adaptation instead of blindly relying on the suggested positive effect of FDI. Finally, the project is the most achievable of the three since it caters to the needs of the two main actors involved—the community and the local businesses. Their dissatisfaction with the current state of the labor market will create a sufficient level of interest and readiness for change. Overall, the suggested project is superior to the other two in terms of safety, cost, and acceptance by the stakeholders.

Conclusion

The full effect of foreign direct investment is yet to be understood. Nevertheless, the currently available data allows us to determine some of its effects on state economies. That which is the most relevant for our project is its supposed positive effect on decreasing unemployment rates. However, it is important to recognize that even this aspect of FDI has not been studied to a degree that allows acceptance without proper precautionary measures. At the same time, the implications of these initial findings can produce feasible results when applied with necessary caution. By reviewing current trends in the existing literature, we came up with a set of recommendations based on the tendency to incorporate the effects of globalization in current economic and social practices. The resulting project is built around the involvement of local businesses and communal effort, which offers a possibility to observe the effect directly and foster trust in the participants.

More importantly, it allows for timely adjustments in the case of deviations and unforeseen variables. Most importantly, it does not rely on massive resource allocation, and therefore, can serve as a small-scale experimental intervention contributing to the knowledge of the subject. Finally, upon successful implementation, the project is expected to eventually enter a self-sustaining phase where it will trigger positive changes in other aspects of the community. Specifically, education, which is often cited as both responsible for and aggravated by the incompetence of the workforce, is expected to either improve or become more susceptible to positive changes after the unemployment rate goes down. Overall, the suggested project is superior to the other two in terms of safety, cost, and acceptance by the stakeholders.

Works Cited

Schmerer, Hans-Jorg. “Foreign Direct Investment and Search Unemployment: Theory and Evidence.” International Review of Economics & Finance 30 (2014): 41-56. Print.

Shaari, Mohd Shahidan, Nor Ermawati Hussain, and MohdSuberi bin Ab. Halim. “The Impact of Foreign Direct Investment on the Unemployment Rate and Economic Growth in Malaysia.” Journal of Applied Sciences Research 8.9 (2012): 4900-4906. Print.

Spence, Michael. “The Impact of Globalization on Income and Employment.” Foreign Affairs 90.4 (2010): 28-41. Print.

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