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Labor Market Flexibility and Inward Foreign Direct Investment

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  • KAMATA Isao

Abstract

Are inward FDI and its increase related to the labor market conditions in the host economy? This is still an open question, as the literature to date provides mixed evidence. This paper addresses this question on the debated relationship between inward FDI and the host country's domestic labor conditions empirically by testing whether the labor market flexibility—or strictness—in a host economy contributes to an increase in inward FDI, using publicly accessible macro-level data. The results of a set of estimations show that a host country with relaxed employment protection tends to attract more inward FDI, which is consistent with the findings in some recent studies. The analysis also indicates that the detected relationship between more flexible employment protection and FDI increases should chiefly be the case in "traditional" OECD members but may not apply to other countries.

Suggested Citation

  • KAMATA Isao, 2020. "Labor Market Flexibility and Inward Foreign Direct Investment," Discussion papers 20057, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:20057
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    References listed on IDEAS

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    1. Gerda Dewit & Holger Görg & Catia Montagna, 2009. "Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(1), pages 93-110, April.
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    3. Beata Smarzynska Javorcik & Mariana Spatareanu, 2005. "Do Foreign Investors Care about Labor Market Regulations?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(3), pages 375-403, October.
    4. Davies, Ronald B. & Vadlamannati, Krishna Chaitanya, 2013. "A race to the bottom in labor standards? An empirical investigation," Journal of Development Economics, Elsevier, vol. 103(C), pages 1-14.
    5. David KUCERA, 2002. "Core labour standards and foreign direct investment," International Labour Review, International Labour Organization, vol. 141(1-2), pages 31-69, March.
    6. Timothy Besley & Robin Burgess, 2004. "Can Labor Regulation Hinder Economic Performance? Evidence from India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 91-134.
    7. Kamata, Isao, 2018. "Can RTA labor provisions prevent the deterioration of domestic labor standards? : the cases of statutory minimum wages and employment protection regulations," IDE Discussion Papers 716, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    8. Olney, William W., 2013. "A race to the bottom? Employment protection and foreign direct investment," Journal of International Economics, Elsevier, vol. 91(2), pages 191-203.
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    Cited by:

    1. KAMATA Isao, 2023. "Foreign Direct Investment and Labor Market Flexibility in Host and Source Countries," Discussion papers 23033, Research Institute of Economy, Trade and Industry (RIETI).

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