We examine the impact of foreign employment on labor shortages in the manufacturing sector in South Korea. To control endogeneity between foreign employment and labor shortages, we employ a shift-share instrumental variable and estimate the two-stage least squares model. The results indicate that an increase in foreign employment significantly reduces firm-level labor shortages. The effect varies by firm size, with stronger impacts observed among small establishments and weaker impacts among large establishments. Overall, our findings suggest that foreign labor inflows play a substantial role in alleviating labor shortages in manufacturing SMEs, particularly among small firms that face severe difficulties in hiring workers.