Analysis Of Nigel Driffield Research Study Essay

Nigel Driffield has made a research on the impact in indirect employment due to inflow of foreign direct investments [FDI] in U. K. In his research paper, the author has examined the effect of local employment associated with foreign inward investment in UK. According to author, a foreign manufacturer who has entered into UK will naturally have a slight edge over the existing manufacturers as they may have enhanced productivity technology as compared to domestic sector. Further, in his study, the author revealed that FDI not only created market disequilibrium in the UK’s domestic sector but also created an employment substitution of 20 percent of all the jobs generated due to FDI. It is to be noted that since 1980, UK is the largest recipient of FDI in European Union. [EU]. Between 1984 and 1991, it attracted about 42 percent of total Japanese investment in EU and about 21 percent of all US FDI since 1987. FDI comprises about one fifth of total investment in UK industry. For instance, since 1987, UK received about 220 billion by way of inflow as FDI. According to Nigel Driffield, FDI has created about 15% of all employment in UK manufacturing sector and it has appended over 23 per cent of all value –added. (Driffield 1999) Since there is a decline in employment in UK manufacturing sector from 1980, UK has encouraged FDI flow into its country. It is to be noted that FDI flow will be advantageous to a country’s economy as it will create employment , technology transfer , increase in productivity and increase in exports and as a result ,an overall increase in country’s gross domestic product [GDP] . Thus, free flow of FDI will create both direct and indirect employment opportunities in a country. It is to be observed that empirical studies carried over by Young et al [1994] , Neven and Siotis [1993], Dunning [1988] on the impact of FDI has found out that FDI flow has its impact on employment generation and regional development. Further, it enhanced allocative efficiency in the economy and also improved the balance of trade and exports of the recipient country . Dunning [1988] in his eclectic theory, Dunning have observed that FDI will bring new or superior product or some firm specific advantage. David Lyons [1991] has concluded that FDI brings productivity advantage and he estimated that productivity advantage is at least 20 percent more than that of domestic sector. Further, Blomstrorm [1989] and Haddad and Harrison [1993] found that FDI has resulted in operation of new plant and thus resulted in advanced technology transfer to the host country. [Dunning, J. H. & Narula, R 1996). However, Nigel Driffield has pondered that as far as UK is concerned, no empirical study has attempted to find out the extent to which flow of inward investment may have a detrimental impact on U. K industry especially in the manufacturing firms with a distinct productivity advantage. The author is of the opinion that it is pertinent to study how FDI in UK has affected the employment position of UK-owned manufacturing companies. Since the foreign manufacturer in UK has productivity advantage, it is claimed by Davies and Lyons[1992 ]that such foreign manufacturing companies will normally pay wages above the industry standard and according to Driffield [1996], there was wage differential up to 7 per cent in UK. (Driffield 1999) According to Nigel Driffield, if there is penetration by foreign manufacturers in a country, it will result in prevalence of high-wage paying, high-productivity firms and hence, ex ante, it will increase wages in domestic sector. To avoid a rise in employee turnover, local firms are compelled to pay more wages to keep employees in high spirit. This will have cyclic effect of increase in wage cost and reduction in employment opportunities. Hence, Nigel comes to a conclusion that a foreign investor with productive advantage will be prepared to pay above-average salary and hence there will be a reduction in domestic employment. According to Nigel, FDI flow in UK will have the following impact: o A decline in employment in the UK-owned sector. o An increase in domestic wage. Thus, UK firms which are compelled to pay increased wages may initiate labour / capital substitution in an effort to enhance productivity factor. However, these initiatives may result in reduction in employment and again, ex ante raises labour productivity. It is to be noted that degree of increase in labour productivity may negate any loss in UK employment over the long run. Nigel Driffield is of the view to study impact of FDI in UK, variables like employment, labour productivity and wages in the domestic sector of UK economy has to be taken into account. According to Marginson [1984], Blanch flower [1986] and Stewart [1991], to arrive at the rate of change of wage equation, one has to include industry specific variables like the proportion of women employees in an industry, monopoly power of the product, research & development expenses and five-firm concentration ratio. (Driffield 1999) According to Nigel Driffield, if FDI directly causes a decline in domestic sales and in domestic employment, then it will be referred by variable [SALE]. In case, if there is employment substitution, then it will be picked by negative coefficient on the foreign employment. [EMPF]. If there is factor substitution, then it will be measured by coefficient on capital investment. [CAPITAL] variables. On the basis of above assumption, Nigel Driffield has developed equation to test these hypotheses. With the help of these equations, it is easy to study the following. ? The degree to which manufacturing jobs generated by foreign companies in UK is able to create changes in the labour market for manual labour. ? To find out how FDI will increase the industry –level wages and minimize employment. Nigel Driffield has tested these hypotheses in two separate time periods from 1986 to 1989 and from 1989 to 1992. It is to be noted that the first period i. e. 1986 to 1989 observeed a key growth in manufacturing immediately following recession of the early part of the 1980’s. The second period, i. e. 1989 to 1992 witnessed a continued decline in employment and manufacturing output. Further, in these above periods, there had been a major increase in the foreign share of manufacturing in UK. Nigel Driffield has revealed in his research that during first period the FDI has pushed up the domestic wage and also caused employment substitution away from the domestic sector. (Driffield 1999) Nigel Driffield study also reveals that there is correlation between flow of FDI and decrease in employment and it also creates an employment substitution of 20 per cent which is equivalent to roughly 5 per cent of the net fall in UK manufacturing employment over the period. Nigel also tired to prove that FDI flow will enhance productivity through factor substitution. He finally concludes that it is not probable to recognize any material deviation between the sales / employment ratio changes for the above mentioned time periods and hence flow of FDI has little effect on domestic capital intensity. He also finds that though there was a slight fall in employment in the above mentioned periods due to flow of FDI in UK, this cannot be attributed to factor substitution.