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Should I Stay or Should I Go? A Note on Employment Protection, Domestic Anchorage, and FDI

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Author Info

  • Dewit, Gerda

    ()
    (National University of Ireland, Maynooth)

  • Görg, Holger

    ()
    (Kiel Institute for the World Economy)

  • Montagna, Catia

    ()
    (University of Aberdeen)

Abstract

This paper examines how employment protection legislation affects location decisions of multinationals. Based on a simple theoretical framework, we estimate an empirical model, using OECD-data on bilateral FDI-flows and employment protection indices. We find that, while an “unfavourable” employment protection differential between a domestic and a foreign location is inimical to foreign direct investment (FDI), a high domestic level of employment protection tends to discourage outward FDI. The results are in line with our conjecture that strict employment protection in the firm’s home country makes firms reluctant to relocate abroad and keeps them “anchored” at home.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 845.

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Length: 20 pages
Date of creation: Aug 2003
Date of revision:
Publication status: published as 'Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage' in: Review of World Economics, 145 (1), 2009, 93-110
Handle: RePEc:iza:izadps:dp845

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Keywords: domestic anchorage; employment protection; foreign direct investment; uncertainty;

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References

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  1. Drusilla K. Brown & Alan V. Deardorff & Robert M Stern, 2002. "The Effects of Multinational Production on Wages and Working Conditions in Developing Countries," Working Papers 483, Research Seminar in International Economics, University of Michigan.
  2. repec:rus:hseeco:121599 is not listed on IDEAS
  3. Dewit, Gerda & Leahy, Dermot & Montagna, Catia, 2003. "Employment Protection and Globalization in Dynamic Oligopoly," CEPR Discussion Papers 3871, C.E.P.R. Discussion Papers.
  4. Stephen Nickell & Luca Nunziata & Wolfgang Ochel & Glenda Quintini, 2001. "The Beveridge Curve, Unemployment and Wages in the OECD from the 1960s to the 1990s - Preliminary Version," CEP Discussion Papers dp0502, Centre for Economic Performance, LSE.
  5. Ray Barrell & Nigel Pain, . "Trade restraints and Japanese direct investment flows," NIESR Discussion Papers 43, National Institute of Economic and Social Research.
  6. Giuseppe Nicoletti & Stefano Scarpetta & Olivier Boylaud, 2000. "Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation," OECD Economics Department Working Papers 226, OECD Publishing.
  7. Giuseppe Nicoletti & Steve Golub & Dana Hajkova & Daniel Mirza & Kwang-Yeol Yoo, 2003. "Policies and International Integration: Influences on Trade and Foreign Direct Investment," OECD Economics Department Working Papers 359, OECD Publishing.
  8. Nickell, Stephen, 1998. "Unemployment: Questions and Some Answers," Economic Journal, Royal Economic Society, vol. 108(448), pages 802-16, May.
  9. Dermot Leahy & Catia Montagna, . "Temporary Social Dumping, Union Legalisation and FDI: A Note on the Strategic Use of Standards," EPRU Working Paper Series 99-08, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  10. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June.
  11. 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.
  12. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, January.
  13. Haaland, Jan I. & Wooton, Ian, 2002. "Multinational Investment, Industry Risk and Policy Competition," CEPR Discussion Papers 3152, C.E.P.R. Discussion Papers.
  14. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  15. Jan I. Haaland & Ian Wooton & Giulia Faggio, 2002. "Multinational Firms: Easy Come, Easy Go?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 3-, February.
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Cited by:
  1. Pierre, Gaëlle & Scarpetta, Stefano, 2004. "Employment Regulations through the Eyes of Employers: Do They Matter and How Do Firms Respond to Them?," IZA Discussion Papers 1424, Institute for the Study of Labor (IZA).
  2. Pierre, Gaelle & Scarpetta, Stefano, 2007. "How labor market policies can combine workers'protection with job creation : a partial review of some key issues and policy options," Social Protection Discussion Papers 41439, The World Bank.

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