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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. Speci?cally, it is assumed that multinationals invest in countries with lower regulatory standards and that countries competitively undercut each other's standards in order to attract foreign capital. This paper tests this hypothesis and finds robust empirical support for both predictions. First, a reduction in employment protection rules leads to an increase in foreign direct investment (FDI). Furthermore, 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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  • William W. Olney, 2010. "A Race to the Bottom? Employment Protection and Foreign Direct Investment," Center for Development Economics 2011-05, Department of Economics, Williams College, revised Aug 2013.
  • Handle: RePEc:wil:wilcde:2011-05
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    More about this item

    Keywords

    Foreign direct investment; Employment protection; Race to the bottom;

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J80 - Labor and Demographic Economics - - Labor Standards - - - General

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