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A Race to the Bottom? Employment Protection and Foreign Direct Investment

A common critique of globalization is that it leads to a race to the bottom. SpeciÂ…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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File URL: http://web.williams.edu/Economics/wp/OlneyEmploymentProtectionAndFDI.pdf
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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2011-02.

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Length: 46 pages
Date of creation: Nov 2010
Date of revision: Aug 2013
Publication status: Published in the Journal of International Economics, 91(2): 191-203.
Handle: RePEc:wil:wileco:2011-02
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