Effects of Foreign Direct Investment on the Performance of Local Labour Markets - The Case of Hungary

Abstract

Post transitional labour markets of the CEE countries have been characterised by marked regional differences. Since labour market differences were mainly generated by demand side factors the paper will concentrate on the spatial pattern of job creation determined mostly by the allocation decisions of foreign investors. Thus, the success or failure of local economies or local labour markets were largely determined by the attractiveness of the individual regions towards FDI. Posttransitional winners of local labour markets can boast of high doses of FDI inflows, while high unemployment regions have been suffering a persistent lack of outside investments. Our analysis intends to identify the winners and losers of transitional local labour markets and to calculate the possible effects of EU-accession on local labour markets in Hungary. Based on micro regional data sets the paper describes the regional distribution of foreign and domestic employment. The first section of the paper discusses the time path of regional labour market differences in Hungary between 1990Hungary between -2001 and identifies the winners and losers of transition. The second chapter analyses the spatial distribution of FDI and domestic firm's employment and identifies the most important explanatory factors of their regional distribution.

Regional Unemployment in the OST Literature

“…Bornhorst and Commander's conclusion is that wages do depend on local labow market conditions, but the actual degree of wage flexibility is insufficient to absorb negative shocks. Fazekas (2000) reaches a similar conclusion when examining the Hungarian case. Rutkowski and Przybila (2002) instead find a positive correlation between the job finding rate and the degree of wage flexibility across Polish regions.…”

“…However, Fazekas (2000) also finds that despite the magnitude of the inflow of capital, its direct impact on local unemployment in Hungary seems to be weak. l b s may be explained by the relatively h~g h share of takeovers as opposed to "green-field" investment during transition, the relatively low labour intensity of foreign investments (compared to domestic enterprises), as well as the practice of hiring from the ranks of employed workers rather than from the pool of unemployed persons.…”

“…Fazekas (2000) finds that in the case of Hungary a sizeable flow of FDI has concentrated in the most urbanised regions where there is a strong concentration of a skilled work force. Moreover, capital inflow is negatively correlated with distance.…”

Internal Labor Mobility in Central Europe and the Baltic Region

“…In Hungary, for example, a recent study of the locational choice of foreign and domestic firms over the 1993 to 2000 period concludes that firms have not moved to high unemployment regions. This, despite lower wages in these regions, despite the relative scarcity of skilled workers in high employment regions, and despite active regional policy aimed at attracting new investments (Fazekas 2003). The study also estimates that while wages are generally higher in high employment regions compared to low employment regions, the productivity differential between these two regions more than compensates for the unit labor cost faced by firms.…”

Industry Agglomerations and Regional Development in Hungary

“…In a paper on the labour market in Hungary during the transition period 1993 to 2000, the Hungarian author Fazekas (2003) analysed the effects of foreign direct investment and other influences on the performance of local labour markets. He described that during the first phases of the transition to a market economy, more than 1.5 million jobs disappeared in Hungary; new jobs were created elsewhere, namely in developed urban agglomerations.…”