Low-tech manufacturing

Transferring low tech manufacturing jobs to cheap labor countries is often seen by part of the general public and policy makers as a step into the de-industrialisation of the European economies. However, several recent contributions have shown that the effects on home economies are rarely negative and often positive.

Examining how outward investment to cheap labor countries affect home activities of firms that turn multinational should be analyzed. The effects of these investment are also compared to the effects of outward investment to developed economies. The analysis is carried out by using propensity score matching in order to build an appropriate counter-factual of national firms. This provides the hypothetical benchmark of what would have happened to domestic activities if firms had not invested abroad.

We find no evidence of a negative effect of outward investment to cheap labor countries. They enhance the efficiency of home activities, with also positive long term effect on output and employment growth. Also we find a positive effect on productivity and the size of domestic activity, although not as robust and significant. Investment to developed economies from both countries have essentially scale effects but which do not trickle down on productivity at home.