Preliminary version.

During the last decade, the opening up of the Central and Eastern European economies have led to an inflow of foreign direct investment. In this paper we analyze how the relocation of production in Swedish multinational enterprises towards Central and Eastern Europe has affected employment in other parts of these firms between 1990 and 1998. Our results show that employment in affiliates located in low-income Southern Europe has decreased dramatically as a consequence of the expansion in Central and Eastern Europe. Furthermore, affiliate activities in Southern Europe becomes more sensitive to changes in wage-costs when multinationals set up production in Eastern Europe. We find that employment in Sweden and in high-income Western Europe also is affected by expansion in Central and Eastern Europe, but the effects seem to be much smaller