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Is the world flat?: Differential regulation of domestic and foreign-owned firms

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  • Asiedu, Elizabeth
  • Esfahani, Hadi Salehi

Abstract

This paper examines the determinants of differential employment restrictions applied to foreign versus domestic firms. We develop a model of employment regulation and test its implications using data from the World Bank's World Business Environment Survey, conducted in 1999/2000. We find that while democratic accountability, corruption, and British legal origin reduce the extent of government intervention in firms' employment decision, they give greater advantage to domestic relative to foreign investors. Rule of law, on the other hand, has a more even effect. Better investment opportunities in the country enhance the government's bargaining power vis-á-vis investors and increase employment intervention, especially in foreign firms engaged in less tradable sectors. We also identify a host of other factors that influence employment restrictions, though none of them entail a differential impact on foreign investors. We find that after controlling for other factors, foreign investors in Latin America face a greater regulatory disadvantage vis-á-vis locals compared to other regions of the world, though this is partly counterbalanced by other effects captured in the model.

Suggested Citation

  • Asiedu, Elizabeth & Esfahani, Hadi Salehi, 2008. "Is the world flat?: Differential regulation of domestic and foreign-owned firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(2), pages 389-411, May.
  • Handle: RePEc:eee:quaeco:v:48:y:2008:i:2:p:389-411
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    References listed on IDEAS

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    1. Juan C. Botero & Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1339-1382.
    2. Blomström, Magnus & Kokko, Ari, 2003. "The Economics of Foreign Direct Investment Incentives," EIJS Working Paper Series 168, Stockholm School of Economics, The European Institute of Japanese Studies.
    3. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-563, July.
    4. Asiedu, Elizabeth & Lien, Donald, 2004. "Capital Controls and Foreign Direct Investment," World Development, Elsevier, vol. 32(3), pages 479-490, March.
    5. Christopher T. Taylor, 2000. "The Impact of Host Country Government Policy on US Multinational Investment Decisions," The World Economy, Wiley Blackwell, vol. 23(5), pages 635-647, May.
    6. Haaland, Jan I. & Wooton, Ian, 2002. "Multinational Investment, Industry Risk and Policy Competition," CEPR Discussion Papers 3152, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Chowdhury, Reza H. & Maung, Min, 2018. "Historical ties between nations: How do they matter in cross-border mergers and acquisitions?," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 30-48.

    More about this item

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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