Abstract <p>Despite the rapid expansion of outward foreign direct investment (OFDI) from emerging economies, its domestic labour market consequences—particularly at the subnational level—remain poorly understood. This paper examines how OFDI from an emerging middle-income economy affects skill composition in home regional labour markets and whether these effects are heterogeneous across the income levels of destination countries. Using a region-sector panel dataset covering 32 Mexican regions and 13 sectors over the period 2007–2017, the analysis employs fixed effects and instrumental variable strategies to estimate the impact of OFDI on the relative demand for high- and low-skilled labour. The results reveal a curious case: in the short run, OFDI directed towards high-income economies is associated with skill downgrading at home, whereas OFDI towards middle-income economies has a skill-neutral effect on skill composition. By adopting a subnational perspective in an emerging economy context, the paper offers new evidence on the home-country effects of OFDI and the uneven domestic consequences of internationalisation. The findings point to a policy trade-off between knowledge acquisition abroad and the short-term evolution of domestic skill demand, underscoring the importance of complementary policies to ensure that OFDI supports human capital upgrading and inclusive sustainable development in emerging economies.</p> Plain language summary <p>For many years, outward foreign direct investment (OFDI) has been linked to economic development, often leading to skill upgrading in the home country. However, most studies focus on advanced economies, leaving a gap in understanding the effects of OFDI from middle-income countries. This article explores how OFDI from emerging economies, like Mexico, affects domestic skill composition, particularly at the regional level. The study finds that OFDI to high-income countries tends to downgrade skills at home, while investments in middle-income countries have a neutral effect. This article uses a region-sector analytical approach to examine the effects of OFDI on local labour markets in Mexico. It combines data from 32 Mexican regions and 13 sectors over a decade (2007–2017) to capture within-country differences. The study employs augmented cost-share equations, a method that helps understand how firms allocate resources to minimize costs, using fixed effects and instrumental variable regressions to address potential biases. The focus is on how OFDI affects the demand for high-skilled versus low-skilled labour. The study uses data from the ORBIS historical ownership database and Mexican Economic Censuses to analyse the number of affiliates abroad and their impact on local employment. The results show that OFDI to high-income countries leads to a decrease in demand for high-skilled labour at home, while increasing the demand for low-skilled labour. This suggests that Mexican firms may be relocating high-skilled functions abroad, leading to skill downgrading in the home country. In contrast, OFDI to middle-income countries does not significantly alter the skill composition, indicating a skill-neutral effect. These findings highlight the need for policies that address the short-term skill downgrading effects of OFDI, while also supporting long-term human capital development. In conclusion, the study provides new insights into the domestic effects of OFDI from emerging economies, emphasizing the importance of considering the destination country's development level. The findings suggest that strategic asset-seeking OFDI in high-income countries may lead to skill downgrading at home unless accompanied by policies that strengthen domestic human capital. Future research should explore the long-term productivity gains and regional development impacts of OFDI, as well as the potential for reverse technology transfers from foreign affiliates to parent firms.</p> <p><i>This text was initially drafted using artificial intelligence, then reviewed by the author(s) to ensure accuracy.</i></p>