Acta Universitatis Danubius. Œconomica, Vol 14, No 3 (2018)

Exploring the employment effect of FDI in BRICS: Does conditionalities matter?

Kunofiwa Tsaurai

Abstract


The study investigated the conditions that should exist in the BRICS (Brazil, Russia, India, China, South Africa) countries in order to enhance FDI’s influence on employment creation using panel data analysis methods [(fixed effects and pooled ordinary least squares (OLS)] with data ranging from 1994 to 2014. In particular, the study explored if economic growth, financial and human capital development are conditions which must prevail in the BRICS countries to enable FDI to reduce unemployment. There is consensus that FDI is one of the cornerstones for economic growth as espoused by endogenous growth theorists (Kumar and Pradhan. 2002; Romer. 1986; Lucas. 1988) and neoclassical growth theory proponents (Nath. 2005; Kaur et al. 2013; Solow. 1956; Swan. 1956). Recent empirical work studied the impact of FDI on unemployment, results of which are mixed, varied and divergent. The FDI-led employment hypothesis, the FDI led unemployment view and the FDI does not have any influence on unemployment are the three groups of findings which are coming out from the literature (see Table 1). In other words, the impact of FDI on unemployment is still far from being a settled matter in literature. Moreover, although literature shows that the positive influence of FDI on employment generation is in the majority, channels through which FDI affects employment is an area which has so far been completely ignored by empirical researchers. To the best of the author’s knowledge, this study is the first to investigate channels through which FDI influences employment. The findings according to both pooled OLS and fixed effects shows that high levels of economic growth, human capital and financial development should be available in the BRICS countries in order for FDI’s positive influence on employment generation to be accelerated. The study therefore urges BRICS countries to implement policies that enhances financial development, economic growth and human capital development in order to realise employment creation benefits triggered by FDI inflows. Future studies should investigate if there are other conditions apart from these three which must exist in the BRICS countries in order to accelerate the realisation of FDI triggered employment generation advantages. 


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