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Labor market institutions and firms’ location choices

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Author Info

  • Vincent Delbecque

    ()

  • Isabelle Méjean

    ()

  • Lise Patureau

    ()

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    Abstract

    The paper evaluates the empirical effects of labor market institutions (LMI) on foreign direct investment (FDI) decisions using an individual dataset describing French firms’ expansion strategies in OECD countries over 1992–2002. First, we provide evidence that labor market institutions do matter in location decisions. Precisely, we show that labor market rigidity significantly reduces the country’s attractiveness for foreign investors. Yet, the effect is of limited magnitude compared to FDI determinants related to the country’s market potential or supply access. Second, we go deeper in the precise role of various LMI dimensions. In line with the literature, we find that stringent employment protection laws have a dampening effect on the location probability. Besides, we show that this is not the only dimension that matters. In particular, we find that the generosity of the unemployment benefit system plays a significant negative role on the country’s attractiveness, even once the role of employment protection is controlled for. Copyright Kiel Institute 2014

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    File URL: http://hdl.handle.net/10.1007/s10290-013-0173-2
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    Bibliographic Info

    Article provided by Springer in its journal Review of World Economics.

    Volume (Year): 150 (2014)
    Issue (Month): 1 (February)
    Pages: 115-148

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    Handle: RePEc:spr:weltar:v:150:y:2014:i:1:p:115-148

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    Related research

    Keywords: Labor market institutions; Foreign direct investment determinants; Firm-level data; Conditional logit analysis; F16; F21; J32;

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    References

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    1. Keith Head & John Ries, 2003. "Heterogeneity and the FDI versus Export Decision of Japanese Manufacturers," NBER Working Papers 10052, National Bureau of Economic Research, Inc.
    2. Isabelle Méjean & Thierry Mayer & Benjamin Nefussi, 2010. "The Location of Domestic and Foreign Production Affiliates by French Multinational Firms," IMF Working Papers 10/22, International Monetary Fund.
    3. Amiti, Mary & Smarzynska Javorcik, Beata, 2008. "Trade costs and location of foreign firms in China," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 129-149, February.
    4. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
    5. Leahy, Dermot & Montagna, Catia, 2000. "Unionisation and Foreign Direct Investment: Challenging Conventional Wisdom?," Economic Journal, Royal Economic Society, vol. 110(462), pages C80-92, March.
    6. PICARD, Pierre M. & TOULEMONDE, Eric, . "Firms agglomeration and unions," CORE Discussion Papers RP -1892, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
    8. Stephen Redding & Anthony J. Venables, 2001. "Economic geography and international inequality," LSE Research Online Documents on Economics 3714, London School of Economics and Political Science, LSE Library.
    9. repec:spo:wpecon:info:hdl:2441/10191 is not listed on IDEAS
    10. Thierry Mayer & Keith Head, 2003. "The Empirics of Agglomeration and Trade," Working Papers 2003-15, CEPII research center.
    11. Smarzynska Javorcik, Beata & Spatareanu, Mariana, 2005. "Do Foreign Investors Care About Labour Market Regulations?," CEPR Discussion Papers 4839, C.E.P.R. Discussion Papers.
    12. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
    13. Gross, Dominique M. & Ryan, Michael, 2008. "FDI location and size: Does employment protection legislation matter?," Regional Science and Urban Economics, Elsevier, vol. 38(6), pages 590-605, November.
    14. Jan I. Haaland & Ian Wooton, 2007. "Domestic Labor Markets and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 462-480, 08.
    15. Beata S. Javorcik & Shang-Jin Wei, 2009. "Corruption and Cross-Border Investment in Emerging Markets: Firm-Level Evidence," Working Papers 062009, Hong Kong Institute for Monetary Research.
    16. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8mcgcdbi is not listed on IDEAS
    17. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
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