Sectoral Distribution of FDI and Employment: Evidence from Post- Transitional European Countries

This paper examines, from the perspective of Post-Keynesian eco-nomics, the effects of Foreign Direct Investment (FDI) on the employment rate in 18 post-transitional European countries from 1995 to 2021. Using a two-step system Generalised Method of Moments (GMM) panel data estimator, we test the hypothesis that the employment impact of investment depends on the inter-action of FDI and domestic investment in terms of crowding-in and crowding-out relationships, assuming that this relationship is sensitive to the sectoral distribu-tion of FDI stock. Our findings suggest that the reallocation of FDI inflows from the manufacturing sector to the less labour intensive financial and information and communication technology (ICT) sectors tends to reduce the employment effect of FDI both directly and indirectly by reducing the magnitude of the crowd-ing-in effect of FDI on domestic investment. The outcome of our study is of great interest to economic policy makers. If foreign investment displaces domestic in-vestment and reduces employment in high value-added sectors, policies in-tended to attract foreign capital could be challenged and undermined. Otherwise, if foreign and domestic investment in sectors with high added value are comple-mentary, it justifies policies aimed at attracting foreign investment.