Project number: FK143041

The aim of this research project is to get a deeper understanding of the impact foreign direct investment has on firms in the local economy. I consider two specific indirect effects, which can be important, but which we know less about. The first is the impact of large foreign-owned firm closures on other firms located nearby and on their employees. It is an especially timely question, given the potential restructuring tendencies in global supply networks. While there are clear negative effects from the lost connections to the nearby foreign-owned firm, some of the local firms can benefit by hiring its former employees, who can help adopting efficient processes or new technologies applied in the foreign-owned firm. A Hungarian database following employees moving across firms and including rich information on firm characteristics allows me to identify these hiring firms and to investigate the different channels of the closure effect, as well as potential impacts on their existing employees. The second effect I investigate is the role a foreign direct investment has in attracting subsequent foreign direct investments to the same location. This can happen via attracting suppliers or providing information about the location for connected firms. Combining worldwide data on ownership connections between firms with information on the location of new foreign direct investment projects allows me to see in which settings and for which type of connections between investors does this process affect location choice. Learning about these patterns might be informative for policy-makers in choosing which type of foreign direct investment to target.