Firm and labor adjustments to FDI liberalization

Abstract

This paper studies how liberalizing outward foreign direct investments affects manufacturers’ engagement in global production and their domestic workers’ labor market outcomes. Focusing on a liberalization policy in 2001 by the government of Taiwan that allowed 122 electronic products to be produced in China, we estimate its effect on Taiwanese electronic manufacturers and their domestic workers. Employing a matched difference-in-differences strategy, we find that the manufacturers targeted by the policy were on average 10% more likely to invest in China relative to the non-targeted ones. Correspondingly, the domestic incumbent workers of the targeted manufacturers were on average more likely to change their jobs, remain employed for fewer years, and have lower wages in subsequent years relative to those employed by the non-targeted ones. The worker-level effects of the policy exhibited substantial heterogeneity across the initial wage distribution, with top-decile workers being less affected and the remaining workers experiencing average losses.