The present paper provides further insights on the relationship between home country employment and foreign direct investment (FDI) undertaken by national firms. The unit of analysis is each ensemble of firms operating in the same industrial sector and localised in the same geographical region. That allows us to capture both direct and indirect effects of foreign production on the parent's environment, which arise through the generation of linkages and externalities. Empirical evidence has been provided with reference to the Italian case in the decade 1985–95. Results suggest that the impact of outward FDI on the labour intensity of domestic production is negative in the case of vertical investment undertaken—especially by smaller firms—in less developed countries, and positive for horizontal and market‐seeking investments in advanced countries.