The Impact of Foreign Direct Investment on Unemployment in Developing Countries: Evidence from Panel ARDL Models

This study examines the impact of Foreign Direct Investment (FDI) on unemployment in 90 developing countries over the period 2000 to 2024. Two assumptions of the FDI impact on unemployment are investigated: the positive externality effects, and the negative effect of both crowding-out of domestic firms and the displacement of local workers. The Panel Autoregressive Distributed Lag ARDL approaches are employed to estimate the long-run and short-run coefficients in three models. The results indicate that all FDI types are associated with unemployment reduction in developing countries. The FDI flow has a high negative association with unemployment, indicating the presence of a strong positive externality of the FDI flow on host developing countries that contributes effectively to reducing unemployment. Moreover, the FDI stock per capita has a highly significant negative relationship with unemployment, consistence with the absence of dominant crowding-out and labor-displacement effects in the long run; therefore, the macroeconomic policies that attract FDI, productivity development of labor, and improvement of management methods are highly recommended in developing economies.