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

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Abstract

A common critique of globalization is that it leads to a race to the bottom. Specifically, 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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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. 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.
  2. 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..
  3. 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.
  4. Nathalia Rios Ballesteros & Thomas Goda, 2017. "Natural resource-seeking FDI inflows and current account deficits in commodity-producing developing economies," DOCUMENTOS DE TRABAJO CIEF 015298, UNIVERSIDAD EAFIT.
  5. repec:ilo:ilowps:470016 is not listed on IDEAS
  6. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 829-842.
  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. Mina, Wasseem & Jaeck, Louis, 2015. "Labor Market Flexibility and FDI Flows: Evidence from Oil-Rich GCC and Middle Income Countries," MPRA Paper 62652, University Library of Munich, Germany.
  9. 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.
  10. Häberli, Christian. & Jansen, Marion. & Monteiro, José-Antonio., 2012. "Regional trade agreements and domestic labour market regulation," ILO Working Papers 994700163402676, International Labour Organization.
  11. Diego Escobari & Diego E. Vacaflores, 2015. "Expectations and the Dynamic Feedback between Foreign Direct Investment and Economic Growth," International Economic Journal, Taylor & Francis Journals, vol. 29(1), pages 121-136, March.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. Häberli, Christian, 2016. "An International Regulatory Framework for National Employment Policies," Papers 963, World Trade Institute.
  17. Jayjit Roy, 2016. "Employment Protection Legislation and International Trade," Working Papers 16-06, Department of Economics, Appalachian State University.
  18. Arthelo P. PALMA, 2016. "Truth Behind Economic Performance, Natural Resources and Attracting Foreign Direct Investment," Expert Journal of Economics, Sprint Investify, vol. 4(2), pages 68-77.
  19. 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.
  20. Joel Hellier & Ekaterina Kalugina, 2015. "Globalization and the working poor," Working Papers 355, ECINEQ, Society for the Study of Economic Inequality.

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