The impact of entry modes of Foreign Direct Investment towards unemployment: Evidence from Asian countries

Abstract

This study attempts to examine the impact of entry modes of foreign direct investment (FDI) namely Greenfield investment and Brownfield investment towards unemployment in 25 Asian countries over the period of 2006 – 2015 (10 years) where the countries were divided into three groups: total, developing and developed Asian countries. The Breuch-Pagan Lagrange Multiplier test has been used to determine whether Ordinary Least Square or Fixed Effect-Instrumental Variables is appropriate for this study. In order to avoid the endogeneity problem that usually occurs in the panel data analysis, this study includes instrumental variables in the fixed effect estimators. The results depict mixed findings where both total and developed Asian countries are negatively significant between FDI and unemployment while both of the entry modes are insignificant. However, for the case of developing Asian countries, this study found insignificant and positive relationship between FDI and unemployment, while both entry modes of FDI were negatively significant towards unemployment. Thus, this study concludes that the entry modes of FDI are significant to reduce unemployment in developing Asian countries compared to developed Asian countries. Corresponding author: Meldebra Hilom-Polinon Email address for corresponding author: meldebrastephen@gmail.com First submission received: 12th May 2019 Revised submission received: 31st July 2019 Accepted: 26th August 2019 1.0 Introduction Foreign direct investment is one of the fuels to the economic growth which it enhances private investment, encourage job creation, knowledge and technological labour skills transfer (Lloyd, 1996). The UNCTAD (2017) reported that the Asian region remains as the largest recipient of foreign direct investment in the world in 2017. Correspondingly, identifying the significance of foreign investors and also examining the effect of the foreign direct investment on the economy has become one of the major attractions for many parties. Basically, domestic investments and foreign investments are able to reduce the unemployment rate by creating more job opportunities in the host countries (Ndikumana & Verick, 2008). According to OECD (2002), foreign direct investment inflow consists of two entry modes namely Greenfield investment and Brownfield investment. Greenfield investment is constructing or creating new businesses in the host countries and for Brownfield investment it consists of merging or buying an existing facility (acquisition). In simply meaning, both Greenfield investment and Brownfield investment are part of foreign direct investment. Moreover, foreign direct investments have been considered as being International Journal of Business and Economic Development, Vol. 7 Number 2 November 2019 www.ijbed.org A Journal of the Centre for Business & Economic Research (CBER) 2 an important source towards the increase in internal market such as creating jobs. Foreign direct investment inflow can influence the economic growth positively by making contribution in reduction of unemployment rate. However, the impact of foreign direct investment towards unemployment can differ depending on the entry modes of foreign direct investment (Bayar & Sasmaz, 2017). An earlier study conducted by Root (1987) mentioned that the development of a worldwide market strategy involves the selection of entry modes of foreign investment. The entry mode of foreign investment can be defined as a process of allowing the firms to enter their product, management or other resources into the targeted new host market (Root, 1987). Firms that enter into a new foreign market have to choose entry modes of foreign direct investment such as Greenfield, Brownfield investment and other modes that involve export either directly or through independent channels (Anderson & Gatignon, 1986). In addition, theoretically, the Greenfield investment can contribute to job creation through the formation of new businesses whereas Brownfield investment can contribute through the transfer of knowledge and technology (Branstetter, 2006). The remaining sections of this paper are organized as follows; 2.0 literature review relating to contra findings on causes by entry modes of FDI; 3.0 data and methodology adopted by this study; 4.0 discussion of the findings and lastly 5.0 conclusion and recommendation of this study. 2.0 Literature review The increase of FDI inflow to a country has attracted the researcher to investigate the economic impacts of FDI inflow. In this context, previous researchers have focused on FDI-unemployment nexus and found that FDI reduces the unemployment rate by creating more job opportunities (Craigwell, 2006; Jayaraman & Singh, 2007; Balcerzak & Zurek, 2011; Lee, Pinn, Ching, & Kogid, 2011; Irpan, Saad, Nor, Noor, & Ibrahim, 2016). However, a few previous researchers found that FDI was not able to reduce unemployment due to the entry modes namely Greenfield investment and Brownfield investment (Mucuk & Dermirsel, 2013; Bayar, 2014; Bayar & Sasmaz, 2017). Conversely, Chaudhuri & Mukhopadhyay (2014) concluded that the FDI has the potential to ease the unemployment for both skilled and unskilled labour in developing countries. While, Irpan et al (2016) used Autoregressive distributed lag (ARDL) and found significant long run relationship between FDI and unemployment in Malaysia from the period of 1980 to 2012. Additionally, a recent study by Amarendra & Oscar (2018) implemented the dynamic panel data specific system (GMM) estimator to address the endogeneity problem in Mexico from the year 2005 to 2015 and concluded that FDI reduced the unemployment rate. However a study by Aktar, Demirci, & Ozturk (2009), found that in Turkey, foreign direct investment did not reduce unemployment due to the entry modes of foreign direct investment when using the Vector Autoregressive System (VAR) technique which included other factors; export, unemployment and gross domestic product (GDP) for the period of 2000 till 2007. Moreover, similar results by Saray (2011) in Turkey found that there was no long run relationship between foreign direct investment and employment from 1970 until 2009. They concluded that foreign direct investment was unable to reduce unemployment. A study by Hisarciklilar, Gultekin-Karakas & Asici (2014) implemented the Generalized Methods of Moments (GMM) for dynamic panel data analysis in 10 sectors and 9 manufacturing sub-sectors for the year of 2000 until 2007. Their study found that foreign direct investment did not increase employment or did not decrease the unemployment rate in Turkey due to the impact of entry modes of foreign direct investment as the country was not attracted to the Greenfield investment in the 21st Century compared to other host countries. International Journal of Business and Economic Development, Vol. 7 Number 2 November 2019 www.ijbed.org A Journal of the Centre for Business & Economic Research (CBER) 3 Similar studies done by Mucuk & Demirsel (2013) found mixed findings in 7 developing countries from 1981 until 2009 when their results using the Dynamic Ordinary Least Squares (DOLS) estimates presented that two out of seven samples of the developing countries were found to have a significantly positive relationship and a significantly negative relationship with unemployment. However, the remaining four countries were found to be insignificant due to the entry modes of foreign direct investment that mainly consist of Brownfield investment inflow during that period of data. Another study conducted by Bayar (2014) found a positive relationship between foreign dirent investment and unemployment in Turkey for the 1st quarter of 2000 till 4th quarter of 2014 by using the Auto Regressive Distributive Lag (ARDL) method due to the flow of Brownfield investment which was unable to generate employment. In addition, a recent study by Bayar & Sasmaz (2017), found a positive relationship between foreign direct investment and unemployment in the long run but a negative relationship between domestic investments on unemployment in 21 emerging economies which consisted of developed and developing countries over the period of 1994-2014 with the similar reason stated above. These contra findings between inflow of foreign direct investment and unemployment (positive relationship) are due to the entry modes of foreign direct investment; Greenfield investment and Brownfield investment. Thus, this study intends to investigate further in this area on the impact of entry modes of foreign direct investment towards unemployment in both of developed and developing Asian countries. 3.0 Data and methodology In this study, the empirical estimation used static panel data regression method and the instrumental variable (IV) estimation due to a potential problem of heteroskedasticity and endogeneity that may occur with the FDI variables in the model which implies that the Ordinary Least Square (OLS) regressions are bias. In this study, the estimation is made by panel data based in Asia which were separated into 3 groups (25 countries of total Asian countries, 15 countries of developing Asian countries, 10 countries of developed Asian countries) for the period of 10 years from 2006 to 2015. All data are gathered from the World Bank Development indicator and UNCTAD Statistics with yearly basis. Logarithmic transformation of data has been done to meet the assumptions that variables are approximately linear with normal distribution. This study followed the recommendation of a recent study by Bayar & Sasmaz (2017) where they found inconsistency with the overall trend in related literatures as a large number of past empirical literature were negatively impacted between foreign direct investment with unemployment. It was suggested that investigations were to be conducted separately to determine the impact of both Brownfield investments and Greenfield investments on unemployment. Thus, this study presents that bot