International migration, foreign direct investment, and development stage in developing economies

• Author: Ei Ei Phyo,Makoto Kakinaka,Hideaki Goto
• Date: 01 May 2019
• DOI: http://doi.org/10.1111/rode.12577
• Published date: 01 May 2019

REGULAR ARTICLE

International migration, foreign direct investment,

and development stage in developing economies

Ei Ei Phyo

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Hideaki Goto

2

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Makoto Kakinaka

3

1

Wisdom Garden Education Center,

Tamwe, Yangon Division, Myanmar

2

International University of Japan,

Minami-Uonuma, Niigata, Japan

3

Hiroshima University, Higashi-

Hiroshima, Hiroshima, Japan

Correspondence

Hideaki Goto, Graduate School of

International Relations, International

University of Japan, 777 Kokusai-cho,

Minami-Uonuma, Niigata 949-7277,

Japan.

Email: h-goto@iuj.ac.jp

Abstract

The existing empirical results on the relationship between

FDI and migration are rather mixed. This study reevalu-

ates, both theoretically and empirically, how inward FDI

relates to emigration in developing countries. Our model

illustrates that the relationship between inward FDI and

emigration flows depends on the development stage of a

developing country, that is, there is a positive association

between inward FDI and emigration flows for relatively

less‐developed countries but a negative association

between these two variables for relatively developed coun-

tries. We confirm the empirical validity of our model pre-

diction using the panel data of 21 OECD and 51 non‐

OECD countries during the period from 2003 to 2012. Our

results argue that as economic development proceeds in a

developing country, the home effect of inward FDI associ-

ated with intensified labor demand would dominate the

linkage effect that induces the brain drain problem through

enhancing the socioeconomic ties with migrant networks.

PACS

F22, F21, O15

KEYWORDS

development stage, income gap, international migration, inward FDI

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INTRODUCTION

International migration has received much attention in the contexts of economic benefits and costs

in a globalized world. Many studies, including Rodrik (2002), suggest that international migration

brings about economic benefits that are likely larger than the gains from trade liberalization.

DOI: 10.1111/rode.12577

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© 2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2019;23:940–956.

However, the causes and consequences of migration can significantly differ between advanced and

developing countries. For example, immigration is expected to mitigate a possible labor shortage

associated with ongoing population aging problems in advanced economies, although there has

been an emergence of protectionism against accepting refugees. However, developing countries are

often confronted with the emigration of highly skilled or well‐educated individuals (called “brain

drain”) towards advanced countries. Concurrently, trade and financial integration at the interna-

tional level have promoted foreign direct investment (FDI) from advanced countries into develop-

ing countries, particularly by multinational enterprises, which might cause advanced and

developing countries to experience different patterns of international labor mobility and their corre-

sponding economic impacts.

This study attempts to examine empirically how inward FDI relates to emigration flows in

developing countries. In particular, given the traditional argument that people have motivation to

pursue high wage positions, this study discusses the role of the difference in the income level

between a developing (source) country and its advanced (destination) country in determining the

association of inward FDI with emigration in developing countries. Although the problems related

to international immigration and outward FDI are important agendas for advanced countries, as

stressed in the new government of Donald Trump in the United States, understanding the link

between inward FDI and emigration flows is also crucial for developing countries to plan and

implement sound economic and migration policies to achieve sustainable long‐run economic devel-

opment.

There are many existing studies on the FDI–migration relationship.

1

Among them, several stud-

ies examine the effect of FDI on emigration flows in developing countries, but their results are

rather mixed. Some empirical studies, such as Aroca and Maloney (2005), find the negative effect

of inward FDI on emigration. However, other studies, including Yang (1998), D'Agosto, Solferino

and Tria (2013), and Wang, Wong, and Granato (2013), show the positive effect of inward FDI.

Sanderson and Kentor (2008) examine the role of inward FDI in 25 developing countries in deter-

mining the net emigration and argue that inward FDI stocks increase the long‐run net emigration,

although inward FDI stocks reduce the net migration in the short run owing to the intensified labor

demand. Wang et al. (2013) find that inward FDI in developing countries tends to reduce emi-

grants with secondary and tertiary education, but it has no significant effect on emigrants with only

primary education. Hayase (2001) examines FDI from Japan to East Asian economies and suggests

that investment could positively or negatively affect international migration.

There could be two contrasting subeffects, namely, the home and linkage effects, of inward

FDI on emigration (out‐migration) in developing countries, as suggested by Wang et al. (2013).

The home effect is the negative link between inward FDI and emigration. Inward FDI increases

the labor demand and wages, which reduces the wage differential between developed and develop-

ing countries. Thus, prospective migrants in developing countries are more likely to stay in their

home countries (Borjas, 1999). In contrast, the linkage effect refers to the argument that inward

FDI can increase emigration since FDI strengthens the links between countries and migrants’net-

works, often through several bilateral agreements that include labor mobility, and help potential

emigrants understand the socioeconomic conditions in the destination country. This positive effect

of inward FDI can also be linked with the brain drain issue, where developing countries host FDI

from developed countries and send educated or skilled migrants to developed countries in

exchange. Thus, the FDI effects on emigration depend on the balancing of the two contrasting

subeffects.

Given the above arguments, this study reevaluates the FDI effects on emigration in developing

countries by focusing more attention on those two contrasting effects. In particular, we take a

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