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Do Foreign Investors Care About Labour Market Regulations?

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Author Info
Smarzynska Javorcik, Beata
Spatareanu, Mariana

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Abstract

This study takes a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labour market flexibility affects FDI flows across 19 Western and Eastern European countries. The analysis is based on firm-level data on new investments undertaken during the 1998-2001 period. The study employs a variety of proxies for labour market regulations reflecting the flexibility of individual and collective dismissals, the length of the notice period and the required severance payment along with a comprehensive set of controls for the business climate characteristics. The results suggest that greater flexibility in the host country’s labour market in absolute terms or relative to that in the investor’s home country is associated with larger FDI flows. The findings indicate that as the labour market flexibility in the host country increases from inflexible (e.g. France) to flexible (e.g. United Kingdom), the volume of investment goes up by between 12% and 26%. FDI in services sectors appears to be more sensitive to labour market regulations than investment in manufacturing.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4839.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4839

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Related research
Keywords: firm-level data; foreign direct investment; labour market regulation;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
J00 - Labor and Demographic Economics - - General - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Juan Botero, 2003. "The Regulation of Labor," NBER Working Papers 9756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Markusen, James R, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-89, Spring. [Downloadable!] (restricted)
  3. Smarzynska Javorcik, Beata & Wei, Shang-Jin, 2001. "Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?," CEPR Discussion Papers 2966, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2000-2), pages 303-354. [Downloadable!]
  5. Haaland, J.I. & Wooton, I., 2000. "Multinational Firms: Easy Come, Easy Go?," Papers 19/00, Norwegian School of Economics and Business Administration-.
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  6. 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. [Downloadable!] (restricted)
    Other versions:
  7. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank. [Downloadable!]
  8. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August. [Downloadable!] (restricted)
  9. Coughlin, Cletus C & Terza, Joseph V & Arromdee, Vachira, 1991. "State Characteristics and the Location of Foreign Direct Investment within the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 675-83, November. [Downloadable!] (restricted)
  10. Hines, James R, Jr, 1996. "Altered States: Taxes and the Location of Foreign Direct Investment in America," American Economic Review, American Economic Association, vol. 86(5), pages 1076-94, December. [Downloadable!] (restricted)
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  11. Smarzynska Javorcik, Beata, 1999. "Composition of Foreign Direct Investment and Protection of Intellectual Property Rights in Transition Economies," CEPR Discussion Papers 2228, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. Léonce Ndikumana & Sher Verick, 2007. "The Linkages between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment," Working Papers 2007-13, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
  2. Holger Görg & Henning Mühlen & Peter Nunnenkamp, 2009. "Firm Heterogeneity, Industry Characteristics and Types of FDI: The Case of German FDI in the Czech Republic," Kiel Working Papers 1544, Kiel Institute for the World Economy. [Downloadable!]
  3. Isabelle Méjean & Lise Patureau, 2008. "Location decisions and Minimum Wages," THEMA Working Papers 2008-06, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
    Other versions:
  4. Markus Leibrecht & Johann Scharler, 2007. "How Important is Employment Protection Legislation for Foreign Direct Investment Flows in Central and Eastern European Countries?," Economics working papers 2007-16, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
    Other versions:
  5. Vincent Delbecque, 2007. "Impact de la fiscalité sur les IDE : Application à un panel d’entreprises françaises," EconomiX Working Papers 2007-1, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  6. Gerda Dewit & Holger Görg & Catia Montagna, 2009. "Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(1), pages 93-110, April. [Downloadable!] (restricted)
  7. Marcel Canoy & Peter Smith, 2008. "Services and the Single Market," Journal of Industry, Competition and Trade, Springer, vol. 8(3), pages 319-347, December. [Downloadable!] (restricted)
  8. Eric Neumayer & Indra de Soysa, 2004. "Globalization and the Right to Free Association and Collective," Labor and Demography 0410006, EconWPA, revised 22 Apr 2005. [Downloadable!]
  9. Gonzalez-Eiras, Martin & Prado, Jr., Jose Mauricio, 2007. "Determinants of Capital Intensive and R&D Intensive Foreign Direct Investment," Seminar Papers 753, Stockholm University, Institute for International Economic Studies. [Downloadable!]
  10. Vincent Delbecque, 2008. "Tax Competition and Foreign Direct Investment: assessing the role of market potential and trade costs in a "Footloose Capital" framework," EconomiX Working Papers 2008-18, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  11. Eva Ryšavá & Elisa Galeotti, 2009. "Determinants of FDI in Czech Manufacturing Industries between 2000-2006," Working Papers IES 2009/17, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2009. [Downloadable!]
  12. Christian Bellak & Markus Leibrecht & Joze P. Damijan, 2007. "Infrastructure endowment and corporate income taxes as determinants of Foreign Direct Investment in Central- and Eastern European Countries," LICOS Discussion Papers 19307, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
    Other versions:
  13. Ndikumana, Leonce & Verick, Sher, 2008. "The Linkages between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment in Sub-Saharan Africa," IZA Discussion Papers 3296, Institute for the Study of Labor (IZA). [Downloadable!]
  14. Roberto Basile & Luigi Benfratello & Davide Castellani, 2005. "Attracting Foreign Direct Investments in Europe: are Italian Regions Doomed?," Development Working Papers 200, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
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