Outward FDI effects in emerging economies: the curious case of skill downgrading at home in Mexican regions

Abstract Despite the rapid expansion of outward foreign direct investment (OFDI) from emerging economies, its domestic labour market consequences—particularly at the subnational level—remain poorly understood. This paper examines how OFDI from an emerging middle-income economy affects skill composition in home regional labour markets and whether these effects are heterogeneous across the income levels of destination countries. Using a region-sector panel dataset covering 32 Mexican regions and 13 sectors over the period 2007–2017, the analysis employs fixed effects and instrumental variable strategies to estimate the impact of OFDI on the relative demand for high- and low-skilled labour. The results reveal a curious case: in the short run, OFDI directed towards high-income economies is associated with skill downgrading at home, whereas OFDI towards middle-income economies has a skill-neutral effect on skill composition. By adopting a subnational perspective in an emerging economy context, the paper offers new evidence on the home-country effects of OFDI and the uneven domestic consequences of internationalisation. The findings point to a policy trade-off between knowledge acquisition abroad and the short-term evolution of domestic skill demand, underscoring the importance of complementary policies to ensure that OFDI supports human capital upgrading and inclusive sustainable development in emerging economies.