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Labor law and innovation revisited

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  • Francis, Bill B.
  • Kim, Incheol
  • Wang, Bin
  • Zhang, Zhengyi

Abstract

This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in (1) firms that heavily rely on external financing, (2) firms that have high R&D intensity, (3) manufacturing industries, and (4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation.

Suggested Citation

  • Francis, Bill B. & Kim, Incheol & Wang, Bin & Zhang, Zhengyi, 2018. "Labor law and innovation revisited," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 1-15.
  • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:1-15
    DOI: 10.1016/j.jbankfin.2018.06.007
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    More about this item

    Keywords

    Employment protection laws; Labor law reform; Corporate innovation; Inventor turnover;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
    • J8 - Labor and Demographic Economics - - Labor Standards
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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