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Labor market institutions and firms’ location choices

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  • Vincent Delbecque
  • Isabelle Méjean
  • Lise Patureau

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

Suggested Citation

  • Vincent Delbecque & Isabelle Méjean & Lise Patureau, 2014. "Labor market institutions and firms’ location choices," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(1), pages 115-148, February.
    • Handle: RePEc:spr:weltar:v:150:y:2014:i:1:p:115-148
    DOI: 10.1007/s10290-013-0173-2
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    Cited by:

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    2. PHOLO Alain & TENIKUE Michel & NAFARI Baraka, 2017. "Market Potential, Agglomeration Effects and the Location of French Firms in Africa," LISER Working Paper Series 2017-19, Luxembourg Institute of Socio-Economic Research (LISER).
    3. Mina, Wasseem, 2020. "Do GCC market-oriented labor policies encourage inward FDI flows?," Research in International Business and Finance, Elsevier, vol. 51(C).
    4. Egger, Hartmut & Etzel, Daniel, 2014. "Union wage-setting and international trade with footloose capital," Regional Science and Urban Economics, Elsevier, vol. 48(C), pages 56-67.
    5. Wasseem Mina, 2018. "Labor Market Policies and FDI Flows to GCC Countries," Working Papers 1201, Economic Research Forum, revised 27 May 2018.
    6. Sulistiyo K. Ardiyono & Arianto A. Patunru, 2022. "The impact of employment protection on FDI at different stages of economic development," The World Economy, Wiley Blackwell, vol. 45(12), pages 3679-3714, December.

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    More about this item

    Keywords

    Labor market institutions; Foreign direct investment determinants; Firm-level data; Conditional logit analysis; F16; F21; J32;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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