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Labor market institutions and firms’ location choices

  • Vincent Delbecque

    ()

  • Isabelle Méjean

    ()

  • Lise Patureau

    ()

The paper evaluates the empirical effects of labor market institutions (LMI) on foreign direct investment (FDI) decisions using an individual dataset describing French firms’ expansion strategies in OECD countries over 1992–2002. First, we provide evidence that labor market institutions do matter in location decisions. Precisely, we show that labor market rigidity significantly reduces the country’s attractiveness for foreign investors. Yet, the effect is of limited magnitude compared to FDI determinants related to the country’s market potential or supply access. Second, we go deeper in the precise role of various LMI dimensions. In line with the literature, we find that stringent employment protection laws have a dampening effect on the location probability. Besides, we show that this is not the only dimension that matters. In particular, we find that the generosity of the unemployment benefit system plays a significant negative role on the country’s attractiveness, even once the role of employment protection is controlled for. Copyright Kiel Institute 2014

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File URL: http://hdl.handle.net/10.1007/s10290-013-0173-2
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Article provided by Springer in its journal Review of World Economics.

Volume (Year): 150 (2014)
Issue (Month): 1 (February)
Pages: 115-148

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Handle: RePEc:spr:weltar:v:150:y:2014:i:1:p:115-148
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  1. Thierry Mayer & Isabelle Méjean & Benjamin Nefussi, 2007. "The Location of Domestic and Foreign Production Affiliates by French Multinational Firms," Sciences Po publications 2007-07, Sciences Po.
  2. 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.
  3. Dermot Leahy & Catia Montagna, 1999. "Unionisation and Foreign Direct Investment: Challenging Conventional Wisdom?," Dundee Discussion Papers in Economics 097, Economic Studies, University of Dundee.
  4. Picard, Pierre M. & Toulemonde, Eric, 2006. "Firms agglomeration and unions," European Economic Review, Elsevier, vol. 50(3), pages 669-694, April.
  5. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
  6. Head, Keith & Ries, John, 2003. "Heterogeneity and the FDI versus export decision of Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 448-467, December.
  7. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
  8. Beata S. Javorcik & Shang-Jin Wei, 2009. "Corruption and Cross-Border Investment in Emerging Markets: Firm-Level Evidence," Working Papers 062009, Hong Kong Institute for Monetary Research.
  9. Head, Keith & Mayer, Thierry, 2003. "The Empirics of Agglomeration and Trade," CEPR Discussion Papers 3985, C.E.P.R. Discussion Papers.
  10. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8mcgcdbi is not listed on IDEAS
  11. International Monetary Fund, 2005. "Trade Costs and Location of Foreign Firms in China," IMF Working Papers 05/55, International Monetary Fund.
  12. Stephen Redding & Anthony J. Venables, 2001. "Economic Geography and International Inequality," International Trade 0103003, EconWPA.
  13. Jan I. Haaland & Ian Wooton, 2007. "Domestic Labor Markets and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 462-480, 08.
  14. Gross, Dominique M. & Ryan, Michael, 2008. "FDI location and size: Does employment protection legislation matter?," Regional Science and Urban Economics, Elsevier, vol. 38(6), pages 590-605, November.
  15. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
  16. repec:spo:wpecon:info:hdl:2441/10191 is not listed on IDEAS
  17. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
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