Final answer:
The displacement effect occurs when jobs created by FDI or new economic activities are nullified by job losses elsewhere, particularly due to outsourcing and the pursuit of lower-cost labor markets.
Step-by-step explanation:
Critics argue that not all new jobs created by Foreign Direct Investment (FDI) represent net additions in employment. This is attributed to the displacement effect, where the jobs created in one area might be offset by jobs lost in another, often as a result of outsourcing and corporate decisions to seek lower-cost labor markets. This complex phenomenon of job shifts doesn't always result in a straightforward increase in employment numbers.
For example, when multinational corporations strategize to minimize costs, they often relocate jobs through outsourcing, leaving developed nations with fewer job opportunities in certain sectors. While some individuals might find employment in new industries or transfer to a different company nearby, others might face relocation, career changes, or even involuntary part-time work or early retirement. The resultant frictional unemployment reflects the time spent between losing one job and finding another in a dynamic, evolving economy.