The Role of Foreign Investment, Trade Liberalization, and Capital Formation in Shaping Industrial Employment:

Evidence from Developing Asian Economies

Abstract

In this study we tried to investigate the factors influencing industrial employment in the developing countries of Asia. The analysis is based on the impact of foreign direct investment, trade openness, education, gross capital formation, labor force participation rate, and urbanization on the share of manufacturing jobs in total employment. We used a quantitative panel data analysis approach covering nine countries from different parts of Asia. They are Bangladesh, India, Pakistan, Indonesia, Malaysia, Thailand, Vietnam, Kazakhstan, and Jordan. We have selected a time period from 1995 to 2019. For the final analysis we used a fixed effects 2SLS (IV) estimation with cluster-robust standard errors to deal with endogeneity, heteroskedasticity, and autocorrelation. Findings show that trade (% of GDP) has the strongest positive and significant impact on the share of manufacturing jobs. Gross capital formation also has a significant and positive influence. Contrary to conventional thought, the influence of FDI and urbanization on industrial employment are statistically insignificant. The impact of labor force participation rate is also insignificant. Surprisingly, there is a significant negative relationship between education and industrial employment, suggesting educated people are going to the service sector. Therefore, policies should be focused on stimulating domestic investment, managing urbanization with sustainable infrastructure development, and aligning education systems to meet the demands for both industry and service sector. For future research, this paper also points toward assessing the relative impact of FDI and knowledge intensive investments.