Do foreign investors care about labor market regulations?
AbstractThe authors take a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labor market flexibility affects FDI flows across 25 Western and Eastern European countries. Their analysis is based on firm level data on new investments during the 1999-2001 period. The authors employ a variety of labor market flexibility measures that capture different aspects of labor laws along with a comprehensive set of controls for business climate characteristics. Indices of labor market regulations reflect the flexibility of individual and collective dismissals, the length of the notice period, and the required severance payment. The results suggest that greater flexibility in the host country's labor market relative to that in the investor's home country is associated with larger FDI inflows, and this effect is found to be stronger in the case of transition economies. The findings indicate that as the labor market flexibility in the host country increases from inflexible (for example, Slovakia) to flexible (for example, Hungary), the volume of investment increases by between 14 and 18 percent. FDI in service sectors appears to be more affected than investments in manufacturing.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 3275.
Date of creation: 01 Apr 2004
Date of revision:
Environmental Economics&Policies; Banks&Banking Reform; Municipal Financial Management; Labor Policies; Labor Markets; Environmental Economics&Policies; Banks&Banking Reform; Trade and Regional Integration; Health Economics&Finance; National Governance;
Other versions of this item:
- Beata Smarzynska Javorcik & Mariana Spatareanu, 2005. "Do Foreign Investors Care about Labor Market Regulations?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(3), pages 375-403, October.
- Beata Smarzynska Javorcik & Mariana Spatareanu, 2005. "Do Foreign Investors Care about Labor Market Regulations?," Working Papers Rutgers University, Newark 2005-005, Department of Economics, Rutgers University, Newark.
- Smarzynska Javorcik, Beata & Spatareanu, Mariana, 2005. "Do Foreign Investors Care About Labour Market Regulations?," CEPR Discussion Papers 4839, C.E.P.R. Discussion Papers.
- 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
- J0 - Labor and Demographic Economics - - General
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