What is it about?
Uncertainty is known to affect firm level employment growth adversely as firms wait for additional information before deciding to hire more workers. Higher uncertainty also reduces the expected marginal profitability of hiring additional workers for an imperfectly competitive profit maximizing firm. Using micro data on Indian firms, this paper shows that exchange rate uncertainty has a negative effect on firm level employment growth but the negative effect is mitigated by foreign equity ownership. Domestic equity finance does not have a similar mitigating impact on firm level employment growth in the face of uncertainty.
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Why is it important?
These results are important as they show that policies to encourage foreign direct investment can have positive spill over benefits in the form of protecting employment growth in the face of higher exchange rate uncertainty. This effect is particularly important for firms in technology intensive sectors. At the same time, external orientation of the firms in the form of exports and imports also determines the impact of exchange rate uncertainty on employment growth. As Indian economy integrates in to the world economy , these results can provide important insights for the policy makers.
Perspectives
I hope this article can provide important clues to policy makers and researchers alike regarding an important issue namely, how exchange rate uncertainty affects firms with different ownership structure and external orientation. It also points towards direction for future research such as identifying transmission channels through which uncertainty affects employment growth and exploring the interaction between macro uncertainty and firm level uncertainty.
Anubha Dhasmana
Indian Institute of Management Bangalore
Read the Original
This page is a summary of: Employment growth in the face of exchange rate uncertainty: The role of trade and foreign equity finance, Southern Economic Journal, March 2021, Wiley,
DOI: 10.1002/soej.12502.
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