University of Groningen Faculty of Economics
Master of Science International Economics and Business
The effects of outward Foreign Direct Investment on the home
economy: The case of the Netherlands
Student: Yvette Bos Student ID: s1386662 Month and Year: June, 2007 Supervisor: Dr. Zhang
Abstract:
This paper studies the effects of foreign direct investment on performance and the level of employment of companies in the Netherlands. It especially focuses on the relationship between foreign capital stock and labour productivity and the level of employment of the parent company, residing in the Netherlands. The results show a negative relationship between foreign capital stock and the parent company’s labour productivity, whereas the level of employment in the parent company is positively affected by foreign capital stock.
Keywords:
Table of Content
1. Introduction... 3
2. Literature review... 5
2.1 Foreign Direct Investment ... 5
2.2 The effects of outward investment on the parent company’s performance... 7
2.2.1 Theoretical background ... 7
2.2.2 Empirical findings... 8
2.3 The effects of outward investment on the parent company’s employment ... 9
2.3.1 Theoretical background ... 9
2.3.2 Empirical findings... 10
3. Research questions... 12
4. Model and hypotheses... 13
4.1 Performance ... 13
4.2 Employment... 16
5. Methods and data ... 19
5.1 Data collection ... 19
5.2 Operationalisation ... 19
Table 1 Description of the variables in the models... 19
5.3 Data analysis ... 21
6. Results and discussion ... 24
6.1 Performance ... 24
6.2 Employment... 25
7. Conclusion ... 27
References... 29 Appendices...Error! Bookmark not defined.
Appendix 1 Average productivity trajectories in home plants Error! Bookmark not defined.
Appendix 2 Description of industry dummy ...Error! Bookmark not defined.
Appendix 3 Assumptions of the multiple regression model....Error! Bookmark not defined.
Appendix 4 Descriptive statistics ...Error! Bookmark not defined.
Appendix 5 Regression result on performance...Error! Bookmark not defined.
Appendix 6 Regression result on performance including control variables...Error! Bookmark not defined.
Appendix 7 Regression result on employment...Error! Bookmark not defined.
1. Introduction
During recent years, international production by multinational enterprises has grown continuously. The motivation to engage in international production differs among companies. A firm may want to exploit the relatively cheap factors of production in a specific location, through vertical foreign direct investment, or it may simply have the desire to establish a presence in a foreign market through horizontal foreign direct investment. Looking at the Netherlands, in specific, one may observe an increase in their foreign direct investment outflow as a percentage of gross fixed capital formation1 from 35,3% in the year 1990 to 98,7% in 20052. As a result, the Netherlands ranked fifth in the year 2005 with regard to their outward foreign direct investment2.
The Netherlands is a small country with regard to its population, though large in terms of its international orientation since the Dutch trade and investment policy is one of the most open policies in the world3. In addition, the Netherlands may be classified as a small open economy, meaning that the Dutch economy is a small part of the world market (Mankiw, 2003). The international oriented policy has always been part of the history of the Dutch economy. For instance, during the 17th century, which was called the Golden Age, the Dutch economy flourished through trade. However, the Netherlands possess little resources and, therefore, strongly relies on international trade. Moreover, the geographical location offers a favourable position for outward investors with two main ports, Schiphol Airport and the harbour of Rotterdam. Overall, the Netherlands has always been and, probably, may always be associated with international activities.
When it comes to research on the effects of foreign direct investment, most literature focuses on the effects on the host economy, inward foreign direct investment. Nonetheless, the home economy may be affected too. Mixed feelings exist about the
1 Gross fixed capital formation is defined as “the total value of a producer’s acquisitions, less disposals, of
fixed assets during the accounting period plus certain additions to the value of non-produced assets realised by the productive activity of institutional units”. (Source: OECD Glossary of Statistical terms;
http://stats.oecd.org/glossary/detail.asp?ID=1171 )
2 Source: UNCTAD, World Investment Report 2006; http://www.unctad.or/wir or
http://www.unctad.org/fdistatistics
home effects. For instance, some feel pride if their country’s multinational is doing well in the Fortunes’ ranking of the largest firms in the world, while others are concerned about the fact that companies may close down domestic plants and open new ones in relative cheap labour countries (Barba Navaretti & Venables, 2004). So, who is right? Do we need to fear companies’ desire to expand their activities internationally or does it rather enhance the home country’s economy? In the case of the Netherlands, people are concerned about, for example, the entrance of the Baltic countries into the European Union. This may result in the opening up of the borders, hence free movement of labour and capital, making it easier for Dutch companies to shift their operations to the Baltic countries. During the period 1982 to 2006, the foreign direct investment outflow of the Netherlands has mostly been destined to developed countries, such as the United States, United Kingdom, and especially to neighbouring countries, like Belgium, Luxembourg, Germany, and France4. Though, investments in Central and Eastern European countries have been growing over the years (Barba Navaretti & Venables, 2004).
In that respect, the question arises what the effects of foreign direct investment are on the home economies. Specifically, what are the effects of outward investment on the Dutch economy in terms of performance and employment? This paper, therefore, investigates the effect of outward investment of Dutch companies on their performance and employment. Specifically, the research focuses on the effect on the performance and employment level of the parent company, residing in the Netherlands, in order to estimate the home-country effects.
The structure of the thesis will be arranged as follows. First, an overview will be provided of previous research on effects of foreign direct investment outflow on the home economy, in particularly, with respect to performance and employment. Second, the research questions, the paper tries to answer, are displayed. Then, both models, which are used to estimate the effects, are explained as well as the data used. Finally, an analysis of the results will be shown, followed by the conclusion.
2. Literature review
2.1 Foreign Direct Investment
Firms can penetrate a foreign market by either engaging in exports or foreign direct investment (FDI), thereby becoming a multinational. FDI is defined by Barba Navaretti & Venables (2004; p2) as “an investment in a foreign company where the foreign investor owns at least 10% of the ordinary shares, undertaken with the objective of establishing a lasting interest in the country, a long-term relationship and significant influence on the management of the firm”.
Firms may be viewed as being a multinational when three conditions are fulfilled. First, the Ownership advantages states that the firm needs to possess a product which enjoys to some extent market power in the foreign market. Second, the Location advantage decides between exporting and local production. Finally, the Internalization advantage distinguishes between licensing and internalization. These three criteria constitute Dunning’s (1977) OLI-paradigm. In general, multinational enterprises are described as “firms that own a significant equity share of 50% or more of another company, either a subsidiary or affiliate, operating in a foreign country” (Barba Navaretti & Venables, 2004; p2).
wages. Nonetheless, the degree of factor intensity in the different production stages needs to be considered in order to benefit from production dispersion (Barba Navaretti & Venables, 2004). In general, the decision to invest abroad concerning factor costs relates to the factor proportions model (Brainard, 1993).
Of course, foreign direct investment leaves its trace in both the home and the host-country. Nevertheless, the extent of the effects depends on the type of investment and the country’s characteristics. Mechanisms transferring the effects may include product market effects, factor market effects, and spillovers. For instance, foreign direct investment may both decrease and increase competition. Also, the overall demand for labour may be affected in the sense that direct investment may either raise employment or decrease labour demand. In addition, spillovers include technological and pecuniary spillovers. Where technological spillovers simply refer to the transfer of technology and pecuniary spillovers relate to the existence of complementarities between the multinational and the local firms. Overall, differences in performance, employment and output effects, and technological sourcing may be observed (Barba Navaretti & Venables, 2004). However, the focus of this paper is on the effects of foreign direct investment on the home economy, hence the parent company.
2.2 The effects of outward investment on the parent company’s performance 2.2.1 Theoretical background
(Clerides et al., 1998) and to the elimination of duplication of the joint input otherwise occurring with independent national firms (Markusen, 1984). Also, it has been argued that foreign competition improves intra-plant efficiency in the sense that changes in the intensity of foreign competition can affect the firm’s technical efficiency (Tybout, 2001). Finally, FDI in low-wage countries is concerned with improving competitiveness through cost reduction whereas FDI in high-wage countries attempts to enhance competitiveness by improving productivity or the quality of the products. Consequently, firms may be able to sustain their market positions, hence a rise in the probability of survival, another measure referring to a firm’s performance (Chen & Ku, 2000).
2.2.2 Empirical findings
al., 1998; Lee, 2003). So, it is hard to make unambiguous conclusions about whether engaging in foreign activities actually enhances a firm’s performance or if it is rather the opposite and that the most efficient firms engage in foreign activities (Lee, 2003).
2.3 The effects of outward investment on the parent company’s employment 2.3.1 Theoretical background
Regarding the relationship between the MNE’s home employment and foreign investment, it has generally been argued that expansion of foreign production, especially in developing countries, reduces labour demand at home. This negative relationship between parent employment and a developing country’s production might indicate that the relatively labour-intensive activities are allocated to low-wage countries (Blomström et al., 1997). In contrast, complementary effects may appear to hold for affiliates at locations with relatively similar factor endowments. Two reasons prevail for explaining the complementarity effect, either an allocation of labour-intensive production to the parent or a need for supervisory or other non-production employment at home (Blomström et al., 1997; Lipsey, 1994).
before and after firms change status, and compares the results with proper counterfactuals.
2.3.2 Empirical findings
3. Research questions
Globalisation remains a source of debate. Specifically, mixed feelings exist about foreign direct investment with regard to the effects on both the home and host country. Concerning the home-country effects, some believe that outward investment boosts economic growth, while others fear the substitution of employment. Since the Netherlands have experienced an increase in their outward investment flow, Dutch citizens are also concerned about the home-country effects in the sense that they wish to know what the effects are of outward foreign direct investment on the Dutch economy. The consequences of FDI may be transmitted through several mechanisms, such as the product market effects, the factor market effects, and spillovers. These mechanisms relate to competition between companies with regard to output and inputs, and technological and pecuniary spillovers (Barba Navaretti & Venables, 2004). This study focuses on the product market effects and the factor market effects. In other words, this research is concerned with the effects of outward foreign direct investment on the home country’s economic performance and employment. However, the analysis will be on firm-level in order to estimate the effects, resulting in the following research questions.
Research questions:
What is the effect of outward investment on the level of labour productivity of the parent company in the Netherlands?
4. Model and hypotheses
This section is concerned with the hypotheses following the research questions. In order to evaluate the research questions with regards to performance and employment, two models will be employed. First, the performance model includes the labour productivity as dependent variable and domestic and foreign capital stock as independent variables. Second, in the employment model the demand for labour is determined by the wage rate in the Netherlands, the firm’s total volume of sales, its domestic capital stock, and its outward investment.
4.1 Performance
According to the literature, outward foreign investment seems to enhance a company’s performance at home. For instance, Barba Navaretti & Castellani (2004) found Italian companies performing better in terms of total factor productivity after investing abroad. It has even been found that measures of performance, including productivity, size and wages, are more likely to be greater at exporting plants and firms (Bernard & Jensen, 1999). Also, a difference in premium of performance exists between exporting firms and firms engaging in FDI in the sense that companies investing abroad are more productive than firms only exporting (Head & Ries, 2003; Lee, 2003). Although many measures of performance exist, this paper will limit its studies on the measure of labour productivity, resulting in the following hypothesis.
Hypothesis 1: The amount of foreign capital stock will have a positive effect on the level of labour productivity of the parent company.
Labour productivity may be defined as “the average product of labour for an entire company, industry or for the economy as a whole” (Pyndick & Rubinfeld, 2001; p188). Specifically, it measures output per unit of labour input. In turn, the amount of output is affected by the amounts and combinations of inputs, namely labour and capital.
inequality. This model assumes that each region has the same production function and that the aggregate production function embodies a Cobb-Douglas form. Their estimation equation incorporates labour, domestic and foreign capital stock, education, and trade-to-GDP ratio to estimate the effect on growth. In relation to this study, the focus is on firm-level analysis with the assumptions that each firm possesses the same production function and that the aggregate production function compares to a Cobb-Douglas form. Moreover, the production function is simplified by the assumptions of operating efficiently and with a given technology, resulting in the following equation to examine the effect of outward investment on firm performance.
Y = AL 1 KD2 KF 3 (1)
Here, output Y is affected by labour input L, domestic KD and foreign capital stock KF. A
is the intercept, which may refer to the level of efficiency with a given technology. Foreign capital stock may be described as the amount of foreign assets the firm holds, hence the level of outward foreign direct investment. Domestic and foreign capital stock are separated to capture their individual effects as well as to account for differences in growth effects (Zhang & Zhang, 2003).
adding labour increases the amount of output at first, though eventually workers become ineffective due to limitations on the use of other fixed inputs (Mankiw, 2003; Pyndick & Rubinfeld 2001). Consequently, in order to control for size, labour productivity will be drawn upon to analyze the effects on firm performance. In other words, the equation will be corrected for the number of employees L.
Y = AL -1 L1 KD 2 KF 3 (2)
L L L L
Since, the assumption of constant returns to scale holds =1, referring to the assumptions of operating efficiently and with a given technology. Therefore, the estimation of labour productivity results in:
Ln y = + 2 lnKD + 3 lnKF + 4 X + (3)
Where, labour productivity y is affected by the level of domestic KD and foreign capital
stock KF, though dependent on the importance of capital in the production function,
which will be indicated by the coefficient parameters (Head & Ries, 2003). In addition, the firm’s characteristics X control for observable changes related to productivity, which include years of existence, capital intensity and industry dummies.
Sources of productivity growth may constitute of the stock of capital and technological change, which concerns new technologies developed to enhance efficiency (Pyndick & Rubinfeld, 2001). Thus, it might be suggested that the domestic capital stock will have a positive effect on labour productivity as is expected for the foreign capital stock.
knowledge and know-how of individual organisations (Fariñas & Moreno, 2000). Also, young firms are often expected to produce new products, capturing high profit margins due to low competition. In addition, age and size seem to be positively correlated. As a result, the relationship between productivity and firm age may be partly due to a correlation between firm age and size (Kok et al., 2006). In general, some studies found a negative relationship between productivity growth rates and firm age and size, whereas others found a positive relationship due to the self-selection process or even no relationship. Nonetheless, this study will control for age, capital intensity and industry effects in order to avoid inaccurate results.
4.2 Employment
Literature has not been able to provide a clear-cut result concerning the demand for labour at home. In specific, the effect of outward investment on employment is rather two-fold. Research indicates that there exists price complementarity between employment in foreign subsidiaries in low-wage counties and home employment, whereas price substitutability seems to prevail between plants based in countries with relatively similar factor costs and home employment (Barba Navaretti & Venables, 2004). Some stylized facts concerning FDI have been established, such as that FDI predominantly flows to advanced countries (Barba Navaretti & Venables, 2004). This compares to Dutch FDI, which predominantly flows to developed countries, like the United States and United Kingdom, and specifically to the neighbouring countries, Luxembourg, Belgium, Germany and France.
Hypothesis 2: The amount of the firm’s foreign capital stock will have a negative effect on the level of employment in the parent company.
the relationship between employment in different parts of the firm, and Brainard & Riker (1997), examining the extent to which expansion of offshore production by US MNE’s reduces labor demand at home and at other offshore locations, use a model that incorporates the wage rate of the parent firm, the wage rate of affiliates in both industrialized and developing countries, and final demand. Moreover, the model of Konings & Murphy (2001) has the unit cost of capital as additional variable in order to analyze the demand for labour by home multinational enterprises in Europe. In order to examine the link between a multinational’s employment growth rate at home and its decision to invest abroad, Debaere (2004) also includes the level of FDI stock into the equation. However, to simplify the model and since the focus of the paper is on the parent firm, the wage rate in the Netherlands will only be considered. As a result, the following estimation equation in logarithmic form results:
Ln LNL = + 1 ln wNL + 2 ln y + 4 ln KD + 5 KF + (4) Where, the amount of labour in the parent company LNL is affected by the wage rate in
the Netherlands wNL, the firm’s sales y, the firm’s level of domestic capital stock KD, and
the firm’s amount of outward investment KF, measured by foreign assets or the firm’s
foreign capital stock.
5. Methods and data
5.1 Data collection
The companies will be selected according to the listing of the EuroNext Netherlands (AEX), the AMX Netherlands, and the Amsterdam Small cap Index (AScX). These lists contain the most active and mid caps as well as the most traded small caps of the Netherlands and is, therefore, a good representative of the developments in the Dutch economy. The financial figures will be obtained from the database Reach of Bureau Van Dijk and the companies’ annual reports, which will be gathered from the website
http://www.jaarverslag.com and the corporate websites. Overall, the dataset includes a total of 32 firms over a seven-year period, namely from 1999 to 2005.
5.2 Operationalisation
To estimate the effect of outward investment on the Dutch economy a firm-level analysis will be executed. Especially, the effect of the outward investment on the parent company will be examined. The variables used in the models to estimate the effects are depicted in Table 1.
Table 1 Description of the variables in the models
Variable Measure Denotation
Dependent
variable: Performance Labour productivity in NL Sales NL/ # employees NL lnprodnl Employment Labour in NL # Employees NL lnlabournl
Independent
variable: Domestic capital stock KD Total assets holding company lnkdomestic
Foreign capital stock
(FDI) KF Total assets - total parent assets lnkforeign
Wage W Hourly wage rate in € in NL lnwage
Output y Total sales lnoutput
First, the parent company’s performance, the dependent variable, will be measured by its labour productivity in the Netherlands, in specific, following Barba Navaretti & Castellani (2004) and Bernard & Jensen (1999). Labour productivity is defined as output per unit of labour input, meaning sales per employee on a firm-level basis (Pyndick & Rubinfeld, 2001). In turn, labour productivity is affected by several explanatory variables, which are the domestic and foreign capital stock, the firm’s age and an industry dummy as control variables. The domestic capital stock in the equation refers to the level of capital the firm holds in its home country, and is therefore measured by the total assets of the holding company or parent company. In contrast, foreign capital stock may be described as capital the firm owns in its foreign countries, hence the firm’s outward investment. In order to arrive at the amount of foreign assets, the total assets of the holding company are subtracted from the total assets of the entire company. Total assets of the entire company are derived from the consolidated balance sheet in the annual report, whereas the holding company’s assets are obtained from the holding company balance sheet in the annual report. As control variables the firm’s age, capital intensity and an industry dummy are added to the regression. The firm’s age will be assessed by the years of existence, which is determined by deducting the year of establishment from the corresponding year. The control variable of capital intensity refers to the amount of total assets of the company divided by the number of employees. Furthermore, the industry dummies will be obtained by implementing the Dutch BIK codes. This means that the companies are categorized according to the first four numbers of the sector, in which they are operating (Appendix 2).
statement of the annual report. As in the former case, domestic capital stock refers to the amount of capital the company possesses in the home country, indicated by the total assets of the holding company, whereas foreign capital stock refers to the holdings in foreign countries, hence foreign assets as indicator for outward FDI. As control variable for the unit cost of capital, the degree of capital intensity is included. This variable actually refers to the importance of capital in the production function (Head & Ries, 2003). The measure is, therefore, described by the capital-to-labour ratio, which depends on input prices (Pyndick & Rubinfeld, 2001). In order to arrive at the capital-to-labour ratio, the total assets of the company stated in the consolidated balance sheet will be divided by the number of employees, as is the case in the performance model. Also, the use of the industry dummies corresponds to the performance model.
5.3 Data analysis
whether the explanatory variables are correlating, the covariance matrix needs to be evaluated. This involves that in the case of correlation between two variables of 0,8 or higher, one may conclude that multicollinearity exists. Finally, the residuals need to be normally distributed since the hypothesis tests rely on the assumption of normal distribution of the errors and the dependent variable. Therefore, the Jarque-Bera test carrying the null hypothesis of errors being normally distributed needs to be run (Hill et al., 2001). Overall, suitable tests will be run on the data to estimate whether the data set obtained is viable before the analysis can be carried out with regard to hypothesis testing. Nevertheless, one needs to decide, firstly, whether to implement a random effects model or a fixed effects model. The random effects model may also be referred to as an error components model and is used when the individual firms in the sample are randomly chosen and taken to be representative of a larger population of firms. In contrast, the fixed effects model is, sometimes, called the dummy variable model, which means that all behavioural differences between individual firms and over time are captured by the intercept (Hill et al., 2001). In order to make the decision, one needs to conduct the Hausman test carrying the null hypothesis of coefficients estimated by random effects estimator are the same as the ones estimated by the fixed effects estimator. This test involves analyzing the residual in the equation in terms of its p-value. If the residual possesses an insignificant p-value, a random effects model needs to be implemented, and vice versa. Overall, the fixed effects model is usually used in case of panel data (Hill et al., 2001). With regard to the performance model, both estimation equations display a significant p-value of the residual. Also, the residuals of the employment model show a significant p-value. Thus, both models, the performance as well as the employment model, employ the fixed effects model.
variances, which does not fulfil the third assumption of the multiple regression model. Third, after running the Lagrange Multiplier test to observe the presence of autocorrelation, it may be concluded that there exists rather an absence of autocorrelation in both equations, which aligns with the model’s assumptions. Fourth, evaluating the covariance matrix may result in the conclusion that the explanatory variables are not correlated with each other. Finally, the assumption of normally distributed residuals is, unfortunately, not fulfilled in the performance model.
6. Results and discussion
6.1 Performance
The results of the regression of domestic and foreign capital stock on labour productivity show a rather surprising outcome (Appendix 5). Domestic capital stock seems to have a positive significant effect on the labour productivity in the parent company with a coefficient parameter of 0,257. In contrast, foreign capital stock displays a negative relationship, though insignificant. The coefficient amounts to – 0, 044 on the level of productivity. This outcome is rather surprising compared to the expectations induced by previous literature, which suggested a positive relationship. Perhaps, this negative relationship may be explained by the costs incurred with engaging in foreign direct investment. It might be hard for a firm to overcome these costs eventually because firms need to execute a relatively low price-cost margin in order to compete in the rapidly changing environment. Moreover, it is possible that the main motive for firms to engage in foreign investment is to create or enhance their presence in the foreign market, thereby reducing the emphasis on cost advantages (Barba Navaretti & Venables, 2004). Overall, domestic and foreign capital stock explain around 11%5 of the variation in labour productivity of the Dutch parent companies. In addition, after looking at the F-statistic it may be concluded that the model is rather significant.
of investments in R&D, resulting in product or process innovations (Fariñas & Moreno, 2000). The variable of capital intensity appears to have a positive, though rather small, significant effect on labour productivity. This implies that adding more capital into the production process may result in higher productivity. In short, introducing the control variables to the model increases the significance of the model in the sense that around 74%6 of the variation in labour productivity is explained by the explanatory variables. To conclude, the regression shows a positive significant effect of domestic capital stock on labour productivity. Nonetheless, the first hypothesis is not supported since the foreign capital stock rather shows a negative, insignificant relationship with labour productivity. In general, adding the control variables to the regression increases the significance of the model, with the variable age having a positive insignificant effect on labour productivity as well as capital intensity, which shows a positive significant relationship with productivity.
6.2 Employment
Analyzing the results of the regression of wage, output, and foreign capital stock on the level of employment yields the following (Appendix 7). First, it can be found that an increase in wage will lead to a decrease in the level of employment, though this relationship is insignificant. Nonetheless, the relationship aligns with the economic theory that an increase in price will result in a decrease in the quantity demanded (Pyndick & Rubinfeld, 2001). Second, the level of output has a positive significant relationship on the level of employment, which is also in line with economic theory, stating that more labour is needed to realise an increase in output (Pyndick & Rubinfeld, 2001). Domestic capital stock appears to have a negative, significant effect on the level of employment. A logical reason for this may include the fact that increasing the amount of capital in the production process reduces the need for labour. Finally, the effect of foreign capital stock is rather positive. This might suggest that Dutch firms rather engage in vertical FDI, since in the case of vertical FDI home employment is rather complemented by foreign employment (Barba Navaretti & Venables, 2004). The reason behind this may
constitute the fact that firms in countries with relative dissimilar factor endowments rather complement each other by supplying different components of the same final good (Brainard & Riker, 1997a; 1997b). Nevertheless, this contradicts the figures on Dutch FDI flowing predominantly to developed countries, such as Luxembourg, Belgium, Germany, France, UK and the US. In general, the model explains around 35%7 of the variation in the level of employment, suggesting a rather viable model, which is supported by the F-statistic.
After controlling for the degree of capital intensity and industry effects (Appendix 8), the variable of capital intensity exhibits a significant negative effect on the level of employment. In other words, an increase in the degree of the capital intensity corresponds with capital being relatively more important in the production process than labour. So, more capital might indicate that the unit cost of capital is cheap compared to labour cost, and therefore reduces the demand for labour (Pyndick & Rubinfeld, 2001). Even though the control variables, capital intensity and industry dummies, are added to the regression, the effects of the other variables remain similar as in the former case.
In short, the variable of wage shows a negative effect on labour demand as does domestic capital stock. In contrast, the level of output related positively to the demand for labour. Furthermore, the hypothesis of the firm’s foreign capital stock negatively affecting the level of employment in the parent company is not supported, rather the effect is positive. Overall, by adding the control variables the significance of the model increases from around 35% to 90% with the control variable of capital intensity exhibiting a negative, significant effect on the level of employment.
7. Conclusion
This paper has attempted to give an answer to the question of the effects of firms engaging in foreign direct investment on the home-country in terms of performance and employment. The focus of the research has been on the Netherlands because of its high ranking as outward investor as well as the lack of studies of home-country effects of FDI on the Netherlands, since most literature has focused on the United States or Sweden. Previous literature has been able to establish a positive relationship between firm performance and their engagement in foreign investment. A company might benefit from improved access to foreign markets (Lee, 2003). Moreover, foreign investment may result in technology transfer, especially if the investment is concerned with establishing an R&D facility in the foreign country (Barba Navaretti & Venables, 2004). For instance, Barba Navaretti & Castellani (2004) found higher performance for Italian companies after investing abroad. Also, substantial differences between exporter and non-exporters are found in terms of firm performance, measured by productivity, size, and wages (Bernard & Jensen, 1999). Nonetheless, the direction of causality remains ambiguous in the sense that it is difficult to estimate whether foreign activities enhance firm performance or rather the opposite (Clerides et al., 1998; Lee, 2003). In that respect, the result of this study is rather surprising as it found a rather negative relationship between foreign capital stock and labour productivity of the parent company. This result implies that outward foreign investment negatively affects the performance of the company in the home-country. Perhaps, companies are unable to overcome the costs associated with expanding foreign activities, especially in this rapidly changing environment.
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