Impact of foreign capital inflows on the economy of a host country through lenses of employment

Abstract

The expansion of multinational corporations has a significant impact on such small economies as Lithuania. While structural changes in the economy indicate the shifts in the sectoral composition of employment and production, the transfer from labour-intensive to knowledge-intensive sectors substantially contributes to the economy's growth and, therefore, its economic security. The paper aims to determine the impact of the expansion of Nordic capital companies in different sectors on sectorial employment in Lithuania. The study aims to fill this gap by conducting an empirical analysis to investigate patterns and interactions between MNC expansion and employment. The research applied correlation, the Augmented Dickey–Fuller and Granger causality tests. Further, to evaluate the impact of sectorial FDI on sectorial employment, we have applied the Clark-Fisher three-sector model by classifying sectors into primary, secondary, and tertiary. A particular emphasis was placed on the need to evaluate the effect of the expansion of MNCs in different sectors from the single country on the host economy's sectorial employment. Thus, inward sectorial FDI might have a distinct impact on sectorial employment. Our findings prove that the expansion of Norwegian capital companies in the secondary sector affects employment in the secondary sector. Meanwhile, secondary sector employment affects Danish capital companies' expansion in the secondary sector. Our study integrates the Clarks-Fisher model of structural changes and internationalization theory, which extends and fills the gap in the interaction between these two theories.