Home Employment Effects of EU Firms' Activities in Central and Eastern European Countries

We study to what extent factor demand in EU parent firms and countries is affected by FDI and affiliate production in the Central and Eastern European countries (CEEC). Since FDI may exert a direct as well as an indirect influence on factor demand, its effect on the investing firm level and the sector level may differ and hence we estimate both. Using the Amadeus database, we construct a dataset for a large number of EU countries, which allows us to perform the estimations for a number of manufacturing sectors separately, following a flexible cost function approach. We find evidence of inter-sector heterogeneity of the effect of FDI on parent firm labor demand, but not a substantial higher impact in ''lower-skilled'' intensive sectors. Our estimations of the factor demand effect of FDI at the sector level confirmed these observations at the investing firm level. Hence, we find that labor demand in the EU is affected from investment in the CEEC. This effect has a significant sector as well as a non-sector component, which are more or less similar in size. The omission of the non-sector component may consequently tend to underestimate the impact of FDI on home country employment.