Do Foreign Investors Care About Labor Market Regulations?
The authors take a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labor market flexibility affects FDI flows across 25 Western and Eastern European countries. Their analysis is based on firm level data...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2004/04/3565779/foreign-investors-care-labor-market-regulations http://hdl.handle.net/10986/14298 |
| Summary: | The authors take a new look at the
regulatory determinants of foreign direct investment (FDI)
by asking whether labor market flexibility affects FDI flows
across 25 Western and Eastern European countries. Their
analysis is based on firm level data on new investments
during the 1999-2001 period. The authors employ a variety of
labor market flexibility measures that capture different
aspects of labor laws along with a comprehensive set of
controls for business climate characteristics. Indices of
labor market regulations reflect the flexibility of
individual and collective dismissals, the length of the
notice period, and the required severance payment. The
results suggest that greater flexibility in the host
country's labor market relative to that in the
investor's home country is associated with larger FDI
inflows, and this effect is found to be stronger in the case
of transition economies. The findings indicate that as the
labor market flexibility in the host country increases from
inflexible (for example, Slovakia) to flexible (for example,
Hungary), the volume of investment increases by between 14
and 18 percent. FDI in service sectors appears to be more
affected than investments in manufacturing. |
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