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How important is employment protection legislation for Foreign Direct Investment flows in Central and Eastern European countries?

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  • Markus Leibrecht
  • Johann Scharler

Abstract

In this article we investigate empirically the importance of labour market conditions and in particular the role of employment protection legislation as determinants of bilateral Foreign Direct Investment (FDI). We find that FDI flows are significantly higher in countries with relatively low unit labour costs. We also find that employment protection legislation does not exert a statistically significant impact on FDI flows. Our results are consistent with the interpretation that transition economies attract FDI via low production costs whereas indirect costs related to the rigidity of the labour market are less relevant. Copyright (c) 2009 The Authors. Journal compilation (c) 2009 The European Bank for Reconstruction and Development.

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Bibliographic Info

Article provided by The European Bank for Reconstruction and Development in its journal Economics of Transition.

Volume (Year): 17 (2009)
Issue (Month): 2 (04)
Pages: 275-295

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Handle: RePEc:bla:etrans:v:17:y:2009:i:2:p:275-295

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  1. Wolfgang Ochel, 2005. "Concepts and Measurement of Labour Market Institutions," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 3(4), pages 40-55, 01.
  2. Jan I. Haaland & Ian Wooton & Giulia Faggio, 2002. "Multinational Firms: Easy Come, Easy Go?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 3-, February.
  3. Carstensen, Kai & Toubal, Farid, 2004. "Foreign direct investment in Central and Eastern European countries: a dynamic panel analysis," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 3-22, March.
  4. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
  5. Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2005. "Institutional Determinants of Foreign Direct Investment," Working Papers 2005-05, CEPII research center.
  6. Maja Micevska, 2004. "Unemployment and Labour Market Rigidities in Southeast Europe," The wiiw Balkan Observatory Working Papers 049, The Vienna Institute for International Economic Studies, wiiw.
  7. Smarzynska, Beata & Spartareanu, Mariana, 2004. "Do foreign investors care about labor market regulations?," Policy Research Working Paper Series 3275, The World Bank.
  8. Liu, Zhiqiang, 2002. "Foreign Direct Investment and Technology Spillover: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 30(3), pages 579-602, September.
  9. Egger, Peter & Winner, Hannes, 2005. "Evidence on corruption as an incentive for foreign direct investment," European Journal of Political Economy, Elsevier, vol. 21(4), pages 932-952, December.
  10. Peter Egger, . "On the Problem of Endogenous Unobserved Effects in the Estimation of Gravity Models," WIFO Working Papers 132, WIFO.
  11. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition," Economic Policy, CEPR & CES & MSH, vol. 22, pages 385-430, 04.
  12. Demekas, Dimitri G. & Horvath, Balazs & Ribakova, Elina & Wu, Yi, 2007. "Foreign direct investment in European transition economies--The role of policies," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 369-386, June.
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Cited by:
  1. Markus Leibrecht & Christian Bellak, . "Does the impact of employment protection legislation on FDI differ by skill-intensity of sectors? An empirical investigation," Discussion Papers 09/21, University of Nottingham, GEP.

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