The Effect of Net Capital Outflow on Unemployment Rate in the OECD Countries 2000–2016

Abstract

Ongoing assumptions on deterioration of the domestic labor market due to capital outflow in the form of FDI are, today, one of the highly disputed areas in economics. Hence, we decided to conduct an empirical research, namely, macroeconomic analysis on studying actual effects of net outward capital on domestic unemployment level of the developed OECD countries. In details, we selected 35 sample countries from the member countries of the OECD and examined them through 17 years period that falls within 2000 - 2016. For our econometric investigation, we built a dynamic panel data for the sampled countries and period based on the WB statistics. Moreover, we constructed our econometric model based on the previously studied works and by including new control variables in order to derive robust empirical results upon regression. Namely, unemployment rate of the OECD member countries was our dependent variable; whereas, such variables as net outward FDI in current billion USD, population growth, inflation rate, dummy variable that captured major effects of financial crisis on unemployment rates in 2008 – 2013, and 1 year lagged variable of our dependent variable were applied as independent variables for our model. Furthermore, we examined our model through one-step GMM Arellano-Bover/Blundell-Bond estimation method. Thus, on the basis of our regression results, it is found that net FDI outflow positively affects on home labor markets of the developed countries, whereas the rest independent variables have shown the opposite trends. Consequently, having provided the forecasted outcome, our focused independent variable net FDI outflow served to prove the set alternative (Ha) hypothesis; whereas, the null hypothesis (H0) has been rejected within our model.