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A Race to the Bottom? Employment Protection and Foreign Direct Investment

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A common critique of globalization is that it leads to a race to the bottom. This hypothesis assumes that multinationals invest in countries with lower regulatory standards and that countries competitively undercut each other?s standards in response. This paper finds empirical evidence of both propositions. First, a reduction in employment protection rules leads to an increase in foreign direct investment (FDI). Not surprisingly, changes in employment protection legislation have a larger impact on the relatively mobile types of FDI. Second, there is evidence that countries are competitively undercutting each other?s labor market standards.

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File URL: http://web.williams.edu/Economics/wp/OlneyEmploymentProtectionAndFDI.pdf
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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2011-02.

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Length: 48 pages
Date of creation: Nov 2010
Date of revision: Jan 2012
Handle: RePEc:wil:wileco:2011-02

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Keywords: foreign direct investment; employment protection; race to the bottom;

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Citations

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Cited by:
  1. Norbäck, Pehr-Johan & Duanmu , Jing-Lin & Skedinger, Per, 2012. "Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data," Working Paper Series, Research Institute of Industrial Economics 935, Research Institute of Industrial Economics.
  2. Gerda Dewit & Holger Görg & Yama Temouri, 2013. "Employment Protection and Relocation with Firm Heterogeneity," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n234-13.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  3. Johannes Becker & Ronald B. Davies, 2013. "Learning and international policy diffusion: the case of corporate tax policy," Working Papers, Oxford University Centre for Business Taxation 1319, Oxford University Centre for Business Taxation.
  4. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Munich Reprints in Economics, University of Munich, Department of Economics 19288, University of Munich, Department of Economics.
  5. Häberli, Christian & Jansen, Marion & Monteiro, José-Antonio, 2012. "Regional trade agreements and domestic labour market regulation," ILO Working Papers, International Labour Organization 470016, International Labour Organization.
  6. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, . "Labor Standards and Human Rights: Implications for International Trade and Investment," Working Papers, Research Seminar in International Economics, University of Michigan 622, Research Seminar in International Economics, University of Michigan.
  7. Mogab, J. & Kishan, R. & Vacaflores, D.E., 2013. "Labor Market Rigidity And Foreign Direct Investment: The Case Of Europe," Applied Econometrics and International Development, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 13(1), pages 35-54.

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