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Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data

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  • Norbäck, Pehr-Johan

    ()
    (Research Institute of Industrial Economics (IFN))

  • Duanmu , Jing-Lin

    (School of Management)

  • Skedinger, Per

    ()
    (Research Institute of Industrial Economics (IFN))

Abstract

In this paper we show, theoretically and empirically, that stronger employment protection legislation (EPL) in a host country has important and differing effects on the various activities of multinational enterprises (MNEs). Using micro data on affiliates to Swedish multinational firms in 20 countries for the period of 1965–1998, we find that increased stringency in EPL is associated with fewer investments in new affiliates and lower employment in existing affiliates. We also find that it is mainly affiliate exports that are affected negatively by stronger EPL, while the impact on local sales is small. This is in accordance with our theoretical model, which predicts that the impact of EPL on the costs of competing firms is likely to put affiliates at a smaller disadvantage when selling for the local market than in the production for exports.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 935.

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Length: 47 pages
Date of creation: 25 Oct 2012
Date of revision:
Handle: RePEc:hhs:iuiwop:0935

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Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
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Fax: +46 8 665 4599
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Keywords: Labor market institutions; Firm heterogeneity; Oligopoly; Platform-FDI; Horizontal-FDI; Micro data;

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References

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  1. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  2. Dermot Leahy & Catia Montagna, 1999. "Unionisation and Foreign Direct Investment: Challenging Conventional Wisdom?," Dundee Discussion Papers in Economics 097, Economic Studies, University of Dundee.
  3. Katariina Nilsson Hakkala & Pehr-Johan Norbäck & Helena Svaleryd, 2008. "Asymmetric Effects of Corruption on FDI: Evidence from Swedish Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 627-642, November.
  4. Walter G. Park & Juan Carlos Ginarte, 1997. "Intellectual Property Rights And Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 15(3), pages 51-61, 07.
  5. John Driffill, 2006. "The Centralization of Wage Bargaining Revisited: What Have we Learnt?," Journal of Common Market Studies, Wiley Blackwell, vol. 44, pages 731-756, November.
  6. Henrik Braconier & Pehr-Johan Norbäck & Dieter Urban, 2005. "Reconciling the Evidence on the Knowledge-capital Model," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 770-786, 09.
  7. Francine Lafontaine & Jagadeesh Sivadasan, 2009. "Do Labor Market Rigidities Have Microeconomic Effects? Evidence from within the Firm," American Economic Journal: Applied Economics, American Economic Association, vol. 1(2), pages 88-127, April.
  8. Olivier Bertrand & Katariina Nilsson Hakkala & Pehr-Johan Norbäck & Lars Persson, 2012. "Should countries block foreign takeovers of R&D champions and promote greenfield entry?," Canadian Journal of Economics, Canadian Economics Association, vol. 45(3), pages 1083-1124, August.
  9. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  10. Braconier, Henrik & Norback, Pehr-Johan & Urban, Dieter, 2005. "Multinational enterprises and wage costs: vertical FDI revisited," Journal of International Economics, Elsevier, vol. 67(2), pages 446-470, December.
  11. Koeniger, Winfried, 2005. "Dismissal costs and innovation," Economics Letters, Elsevier, vol. 88(1), pages 79-84, July.
  12. Davies, Ronald & Norback, Pehr-Johan & Tekin-Koru, Ayca, 2007. "The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata," MPRA Paper 6031, University Library of Munich, Germany.
  13. Olney, William W., 2013. "A race to the bottom? Employment protection and foreign direct investment," Journal of International Economics, Elsevier, vol. 91(2), pages 191-203.
  14. 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.
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