The Effect of Foreign Direct Investment (FDI) on the Labor Force of Mauritius

Introduction

Foreign Direct Investment (FDI) has become an important source of capital for developing countries, providing them with access to finance, technology, and new markets. The impact of FDI on the employment of Mauritius is a topic of interest to researchers, policymakers, and business analysts. Mauritius is an island country located in the Indian Ocean and has been one of the most successful countries in attracting FDI inflows in recent years. According to Hill and Athukorala (1998), FDI has been critical in boosting social and distributional systems in developing nations. Further, traditional arguments have argued that FDI boosts the host nation's economy and, in that way, enhances economic opportunities. In continuation, these studies noted that apart from FDI generating employment in the sectors directly associated with FDI, it also supports local businesses.

In the case of Mauritius, there has been a growing interest in understanding the relationship between FDI and employment due to the country's status as a tax haven and its efforts to attract more foreign investment. Since its independence, Mauritius has achieved effective economic development based on a well-functioning market economy and a democratic political system. The country ranks high in several global indicators. For example, Ease of Doing Business ranks Mauritius #1 in Africa and #13 out of 190 countries (World Bank, 2020). Mauritius is famous for low tax rate and has favorable environment for foreign companies to flourish in the country. Although Mauritius has made great progress on the economic front, unemployment remains a major challenge. Since 2010, unemployment rate was on a slow downtrend. In 2019 Mauritius had a workforce of 591,000, with an overall unemployment rate of 7.2% of her. In the same year, the female unemployment rate (11.1%) significantly exceeded the male unemployment rate (4.9%) (Statistics Mauritius, 2020a). Unemployment rates worsen in 2020 during the pandemic.

The purpose of this study was to investigate the effect of FDI inflows on employment in Mauritius. Mauritius is a developing country with a small economy on its path to become a developed country, has been actively promoting FDI to promote economic growth and development. The results of this study will provide important insights into understanding the effectiveness of FDI in promoting employment in Mauritius. The study will be valuable for policymakers, businesses, and the general public, who are interested in understanding the role of FDI in supporting employment in the country. A multilinear regression analysis was conducted using data from the period 2009 to 2019.

Research MethodologyAnd Analysis

The empirical study examines the following determinants: employment, FDI inflow, unemployment, gross value added, public investment, private investment and education. Table below shows the variables that are used and its data sources.

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The general form of a multiple linear regression model:

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Where

Y is the dependent variable

Xi are the independent variables

ßi measure the impact of the dependent variable on the independent variable

St is the random error term

Multiple Linear Regression (R) is used to find out the relationship between Foreign Direct Investment (FDI), Employment (EMPL), unemployment (UNEMPL), Gross Value Added (GVA), Public Investment (PUBinvest) and Private Investment (PVTinvest). The formula applied is:

EMPLt = ßo + FDIt + UNEMPLt + GVAt + PUBinvestt + PVTinvestst + EDUt+ £t

The study started with descriptive statistics of all variables. The descriptive statistics for both dependent and independent variables of the study are presented, which includes the mean, median, maximum, minimum, and standard deviations of 10 observations associated with each of the 7 variables analyzed. The results show that many variables have low standard deviations in comparison to their mean and median values This provide a numerical summary of the variables included in the dataset. This summary can be used to gain a basic understanding of the central tendencies, variability, and range of the variables.

The paper next conducted a correlation matrix among the variables. The results show the correlation coefficients between employment (EMPL) and the independent variables: foreign direct investment (FDI), unemployment (UNEMPL), gross value added (GVA), public investment (PUBinvest), private investment (PVTinvests), and education (EDU). The correlation coefficient is a statistical measure that shows the degree of association between two variables. The correlation coefficient can range from -1 to 1, with -1 indicating a perfect negative correlation, 0 indicating no correlation, and 1 indicating a perfect positive correlation. Interesting to note that the coefficient between EMPL and FDI is 0.6604, indicating a positive correlation between the two variables. In the meanwhile, GVA has a stronger positive correlation with EMPL (0.94) and FDI (0.76), indicating that an increase in GVA is associated with an increase in both EMPL and FDI. UNEMPL has a weak negative correlation with GVA (-0.53), which suggests that higher levels of GVA are associated with lower levels of unemployment.

PUBinvest and PVTinvests have positive correlations with all variables in the study, although the correlations are relatively weak. This suggests that higher levels of public and private investment are associated with higher levels of employment, FDI, and GVA. Overall, this correlation table provides initial insights into the relationships between the variables in the study and can be used to guide further analysis in the regression model. Nevertheless, the results of the correlation analysis provide insights into the relationships between the variables, which can be useful in formulating hypotheses and designing further research.

Last one, the paper did six multiple regression analysis to show how each variable interact with the independent variable (EMPL).

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It was interesting to see that the FDI inflow have a positive and significant effect on labor force of Mauritius in the first 2 regression analysis. Then loss its significant when adding more variables. This suggests that FDI inflows have somewhat contributed to job creation and economic growth in the country but other factors seem to have contributed more.

On the other hand, unemployment (UNEMPL) has a positive coefficient in all models, with the highest coefficient in Model 3 (2.701) and Model 4 (2.8078), which are statistically significant at the 5% level. This suggests that higher unemployment rates are associated with higher employment levels. This may be due to more people are entering the working population because firms are more likely to hire people or government policies are affecting unemployment which could boost employment levels.

Gross Value Added (GVA) has a positive and statistically significant coefficient in all models, indicating that an increase in GVA is associated with an increase in employment. The coefficient of GVA is highest in Model 3 (0.0004) and Model 4 (0.0004), where it is statistically significant at the 1% level. The estimated coefficient suggests that a one-unit increase in GVA leads to a 0.0004 increase in employment.

Public Investment (PUBinvest) has a positive coefficient in all models, but it is only statistically significant in Model 5 (0.0012) and Model 6 (0.0015), suggesting that higher public investments lead to higher employment levels, but only when controlling for other factors.

Private Investments (PVTinvests) has a negative coefficient in Model 5 (­0.0008) and Model 6 (-0.0009), although it is not statistically significant in any of the models. This indicates that private investments may not have a significant effect on employment levels. This could be due to several factors, such as automation and outsourcing of jobs.

Finally, Education (EDU) has a positive coefficient in Model 6 (0.0010), although it is not statistically significant. This suggests that higher levels of education may lead to higher employment levels, but the effect is not strong enough to be statistically significant or the effect of education on employment may not be captured by this particular model.

In summary, the results indicate that FDI, UNEMPL, GVA, and PUBinvest have a significant effect on employment levels, while PVTinvests and EDU do not. However, the magnitude and statistical significance of the effects vary across the different models, indicating that the relationship between the independent variables and employment is complex and may be influenced by other factors not included in the analysis.

Discussion

The goal of this study was to determine how FDI inflows affected employment in Mauritius. According to the findings of the summary data, employment in Mauritius and FDI inflows are positively correlated. This is in line with earlier studies that discovered an association between FDI inflows and employment in emerging nations (Asiedu, 2002; Chakraborty & Nunnenkamp, 2008). Also, the findings of the multilinear regression analysis models 1 and 2 show that employment in Mauritius is positively affected by FDI inflows in a statistically meaningful way. This suggests that a rise in FDI inflows may result in a rise in employment throughout the nation. This result is consistent with previous research that has found a positive relationship between FDI inflows and employment (Li, 2010; Rahman & Razzaque, 2010).

Furthermore, it provides important insights into the relationship between various economic factors and employment levels in Mauritius. The summary statistics reveal that the mean employment level is 36.4, with a standard deviation of 6.1, indicating that the employment levels are relatively stable in the region. The correlation matrix indicates that there is a positive correlation between employment and gross value added (GVA), with a correlation coefficient of 0.9378. This suggests that as GVA increases, employment levels also tend to increase. Additionally, there is a negative correlation between unemployment and employment, with a correlation coefficient of -0.2526, indicating that as unemployment rates increase, employment levels tend to decrease which is expected.

These results are consistent with previous research on the relationship between economic factors and employment levels. The positive correlation between GVA and employment is well-established, as GVA is a measure of economic output and is closely related to employment levels. This suggests that policies that aim to increase GVA, such as improving infrastructure or promoting innovation, can have a positive impact on employment. The negative correlation between unemployment and employment is also consistent with previous research, as high unemployment rates typically lead to lower employment levels.

A positive correlation between FDI inflows and gross value added is additionally demonstrated by the correlation matrix (GVA). This suggests that FDI inflows may also boost a nation's economic development. This result is in line with earlier studies that discovered a positive correlation between FDI inflows and economic growth (Asiedu, 2002; Li, 2010).

The correlation matrix does, however, also show an inverse relationship between FDI inflows and unemployment. This shows that FDI inflows might not be successful in lowering Mauritius' unemployment rate. This result contrasts other studies that found a link between FDI inflows and unemployment to be negative.

The findings of this study have significant policy-making ramifications in Mauritius. The correlation between FDI inflows and employment is positive, indicating that initiatives to promote FDI inflows may increase job possibilities in the nation. However, the negative relationship between FDI inflows and unemployment raises the possibility that FDI-focused policies may not be sufficient to lower unemployment in the nation. Policymakers should instead concentrate on fostering an atmosphere that encourages FDI while simultaneously fostering employment possibilities for locals.

The economic situation determines the performances of FDIs and employment in a country. Good economic performances are important in attracting FDIs to a country. The varying performances of the economy had an impact on the FDI of the country. A good performance is an indicator of performing FDIs and other segments of the economy. When the economy was performing well between 2010 and 2019, FDIs were also recording good performances. However, poor economic performances were also evident with the low performances of FDIs in the same period. Therefore, the negative correlations could have been a product of the economic situation.

As a potential factor that can affect the relationship between FDI and employment, tax haven status of a country has been widely discussed in previous literature (Castells-Quintana & Royuela, 2016; Cobham & Jansky, 2018). When a country becomes a tax haven, it attracts multinational corporations to establish their subsidiaries and invest in the country, leading to an increase in FDI inflows (De Mooij & Ederveen, 2003). However, the extent to which FDI inflows result in employment creation in tax havens is unclear. On the one hand, some studies suggest that tax havens are less likely to reduce unemployment due to the lack of domestic demand and limited domestic production. On the other hand, some studies argue that tax havens are associated with higher levels of employment due to the low taxes and business-friendly environment that they offer (Hines, 2010). Therefore, it is important to consider the potential impact of tax haven status when examining the relationship between FDI and employment.

Furthermore, in the case of Mauritius, the country has a well-established tax haven status, which has attracted substantial FDI inflows in recent years. According to Trading Economics (2021), the FDI inflows in Mauritius have been steadily increasing over the past decade, with the latest recorded value of USD 735 million in 2020. However, despite the significant FDI inflows, the employment rate in Mauritius has been fluctuating in recent years, with a decrease from 2017 to 2019 (World Bank, 2021). This raises questions about the extent to which FDI inflows in Mauritius have contributed to employment creation in the country. Therefore, it is necessary to examine the relationship between FDI and employment in Mauritius and to investigate whether tax haven status plays a role in this relationship.

In addition, previous research has shown that the impact of FDI on employment can vary depending on the sector of investment. For instance, FDI in the manufacturing sector is often associated with job creation due to the labor-intensive nature of manufacturing activities. On the other hand, FDI in the service sector, particularly in finance and business services, may have a limited impact on employment creation. Therefore, it is crucial to consider the sectoral composition of FDI when examining its impact on employment in Mauritius.

Limitation

The study on the impact of foreign direct investments has been gaining momentum lately. This study aimed at examining the phenomenon in the context of Mauritius. The finding showed that there is a somewhat positive relationship between FDI and employment in the country but not significant. Despite the study proving that FDI does affect employment, several negatives affected the study process. The major limitation was the statistical knowledge of the researcher. Although the researcher had basic statistical knowledge, it was not enough to analyze the data.

Additionally, the data used in this study is limited to the period from 2010 to 2019, which may not be representative of the long-term effects of FDI on employment in Mauritius. Therefore, caution should be taken when generalizing these results beyond this time frame.

The study focuses on the relationship between FDI and employment in Mauritius, but there are several other factors that can influence this relationship. For example, the business environment in Mauritius, the quality of the local workforce, and the level of government support can all affect the impact of FDIs on employment. This study also didn't consider the broader social and environmental impacts of FDIs. For example, FDIs can have positive effects on the local economy, but they can also have negative impacts on the local environment, social norms, and cultural values. Further research is necessary to understand the mechanisms through which FDI impacts employment in Mauritius and to explore potential policy interventions that could mitigate the negative effects of FDI on employment rates.

All these factors were not included in the regression analysis, which can limit the validity of the results. Moreover, the study does not consider the impact of tax haven policies on the employment trends in other countries. The impact of tax haven policies on employment can vary greatly across countries, depending on the local business environment, the level of government support, and the competitiveness of the local workforce.

Furthermore, the study relied solely on secondary data sources, which may be subject to measurement errors and biases. In addition, the study did not take into account the possibility of endogeneity, which may arise due to the bidirectional relationship between FDI and employment. And the study could have credible issues since sources like World Bank cannot retrieve some data from Mauritius.

Finally, it should be noted that the results of this study may not be generalizable to other countries, as the factors that affect employment may differ depending on the country's economic, social, and political context.

In light of these limitations, further research is recommended to better understand the long-term effects of FDI on employment in Mauritius, taking into account other potential factors that may influence this relationship.

Conclusion

In conclusion, this study aimed to investigate the impact of Foreign Direct Investment (FDI) on employment in Mauritius. Based on the extensive documentation of the benefits of FDIs by the United Nations Conference on Trade and Development (UNCTAD) and the results of the regression analysis, the hypothesis that FDI has a significant and positive impact on employment in Mauritius was tested.

The results showed that FDI inflows do not have a significant effect on employment in model 3 to 6. Instead, the study found that gross value added (GVA) is the most significant variable affecting employment in Mauritius, followed by public investment (PUBinvest) and unemployment (UNEMPL). However, it is important to note that these findings may not be generalizable to other countries and contexts due to the limitations of the study. The study also discussed the effect of tax havens on the employment trend in Mauritius, which has been identified as a tax haven. However, it is important to note that the results are subject to certain limitations, such as the small sample size and the reliance on secondary data sources.

This study provides valuable insights for government stakeholders and investors in Mauritius. Given that GVA, PUBinvest, and UNEMPL have a significant impact on employment, the government should focus on policies that promote economic growth, increase public investment, and reduce unemployment. Additionally, investors should consider investing in sectors that contribute to GVA, such as manufacturing and finance, to promote job creation in Mauritius.

In light of the results, it is recommended that further research be conducted to better understand the relationship between FDI and employment in Mauritius. This can be achieved through the use of larger and more diverse data sources, as well as through the implementation of longitudinal and comparative studies. Additionally, the role of tax havens in the employment trend of Mauritius should be explored in greater detail, as it may have a significant impact on the relationship between FDI and employment in the country.

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