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

Abstract

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

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Find related papers by 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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Cited by:

  1. Blanchard, Emily J., 2014. "What global fragmentation means for the WTO: Article XXIV, behind-the-border concessions, and a new case for WTO limits on investment incentives," WTO Staff Working Papers ERSD-2014-03, World Trade Organization (WTO), Economic Research and Statistics Division.
  2. Wasseem Mina & Louis Jaeck, 2015. "Labor Market Flexibility and FDI Flows: Evidence from Oil-Rich GCC and Middle Income Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1501, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Joel Hellier & Ekaterina Kalugina, 2015. "Globalization and the working poor," Working Papers 355, ECINEQ, Society for the Study of Economic Inequality.
  4. Demir, Firat, 2016. "Effects of FDI Flows on Institutional Development: Does It Matter Where the Investors are from?," World Development, Elsevier, vol. 78(C), pages 341-359.
  5. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 829-842.
  6. Escobari, Diego & Vacaflores, Diego, 2014. "Expectations and the Dynamic Feedback between Foreign Direct Investment and Economic Growth," MPRA Paper 58657, University Library of Munich, Germany.
  7. Mogab, J. & Kishan, R. & Vacaflores, D.E., 2013. "Labor Market Rigidity And Foreign Direct Investment: The Case Of Europe," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 35-54.
  8. Drusilla K Brown & Alan V Deardorff & Robert M Stern, 2013. "Labor Standards and Human Rights: Implications for International Trade and Investment," World Scientific Book Chapters, in: Regulation of Foreign Investment Challenges to International Harmonization, chapter 5, pages 153-195 World Scientific Publishing Co. Pte. Ltd..
  9. Daniel Rais, 2016. "An International Regulatory Framework for National Employment Policies," Papers 963, World Trade Institute.
  10. Johannes Becker & Ronald B. Davies, 2013. "Learning and international policy diffusion: the case of corporate tax policy," Working Papers 1319, Oxford University Centre for Business Taxation.
  11. ROUGIER Eric, 2015. "\"The parts and the whole”: Unbundling and re-bundling institutional systems and their effect on economic development," Cahiers du GREThA 2015-12, Groupe de Recherche en Economie Théorique et Appliquée.
  12. Norbäck, Pehr-Johan & Duanmu , Jing-Lin & Skedinger, Per, 2012. "Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data," Working Paper Series 935, Research Institute of Industrial Economics.
  13. Topal, Pinar, 2015. "Fiscal stimulus and labor market flexibility," SAFE Working Paper Series 90, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  14. Häberli, Christian & Jansen, Marion & Monteiro, José-Antonio, 2012. "Regional trade agreements and domestic labour market regulation," ILO Working Papers 470016, International Labour Organization.
  15. Gerda Dewit & Holger Görg & Yama Temouri, 2013. "Employment Protection and Relocation with Firm Heterogeneity," Economics, Finance and Accounting Department Working Paper Series n234-13.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  16. Jayjit Roy, 2016. "Employment Protection Legislation and International Trade," Working Papers 16-06, Department of Economics, Appalachian State University.
  17. King Yoong Lim, 2015. "Industrial Transformation with Heterogeneous FDI and Human Capital," Centre for Growth and Business Cycle Research Discussion Paper Series 213, Economics, The Univeristy of Manchester.

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