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A race to the bottom? Employment protection and foreign direct investment

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  • Olney, William W.

Abstract

A common critique of globalization is that it leads to a race to the bottom. Specifically, it is assumed that multinationals invest in countries with lower regulatory standards and that countries competitively undercut each other's standards in order to attract foreign capital. This paper tests this hypothesis and finds robust empirical support for both predictions. First, a reduction in employment protection rules leads to an increase in foreign direct investment (FDI). Furthermore, changes in employment protection legislation have a larger impact on the relatively mobile types of FDI. Second, there is evidence that countries are competitively undercutting each other's labor market standards.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 91 (2013)
Issue (Month): 2 ()
Pages: 191-203

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Handle: RePEc:eee:inecon:v:91:y:2013:i:2:p:191-203

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Foreign direct investment; Employment protection; Race to the bottom;

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Citations

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Cited by:
  1. Gerda Dewit & Holger Görg & Yama Temouri, 2013. "Employment Protection and Relocation with Firm Heterogeneity," Economics, Finance and Accounting Department Working Paper Series n234-13.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  2. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Munich Reprints in Economics 19288, University of Munich, Department of Economics.
  3. Johannes Becker & Ronald B. Davies, 2013. "Learning and international policy diffusion: the case of corporate tax policy," Working Papers 1319, Oxford University Centre for Business Taxation.
  4. Häberli, Christian & Jansen, Marion & Monteiro, José-Antonio, 2012. "Regional trade agreements and domestic labour market regulation," ILO Working Papers 470016, International Labour Organization.
  5. Norbäck, Pehr-Johan & Duanmu , Jing-Lin & Skedinger, Per, 2012. "Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data," Working Paper Series 935, Research Institute of Industrial Economics.
  6. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, . "Labor Standards and Human Rights: Implications for International Trade and Investment," Working Papers 622, Research Seminar in International Economics, University of Michigan.
  7. Mogab, J. & Kishan, R. & Vacaflores, D.E., 2013. "Labor Market Rigidity And Foreign Direct Investment: The Case Of Europe," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 35-54.

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