Do Foreign Investors Care About Labor Market Regulations?
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World Bank, Washington, D.C.
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The authors take a new look at the
regulatory determinants of foreign direct investment (FDI)
by asking whether labor market flexibility affects FDI flows
across 25 Western and Eastern European countries. Their
analysis is based on firm level data on new investments
during the 1999-2001 period. The authors employ a variety of
labor market flexibility measures that capture different
aspects of labor laws along with a comprehensive set of
controls for business climate characteristics. Indices of
labor market regulations reflect the flexibility of
individual and collective dismissals, the length of the
notice period, and the required severance payment. The
results suggest that greater flexibility in the host
country's labor market relative to that in the
investor's home country is associated with larger FDI
inflows, and this effect is found to be stronger in the case
of transition economies. The findings indicate that as the
labor market flexibility in the host country increases from
inflexible (for example, Slovakia) to flexible (for example,
Hungary), the volume of investment increases by between 14
and 18 percent. FDI in service sectors appears to be more
affected than investments in manufacturing.
Palabras clave
ABATEMENT COSTS, ACCOUNTING, CAPITAL FLOWS, CORRUPTION, DEVELOPMENT INDICATORS, ECONOMIC ACTIVITY, ECONOMIC PERSPECTIVES, ECONOMIC REVIEW, EMPIRICAL ANALYSIS, EMPLOYMENT, ENVIRONMENTAL STANDARDS, EXCHANGE RATE, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN EXCHANGE CONTROLS, FOREIGN FIRMS, FOREIGN INVESTMENT, FOREIGN INVESTORS, FOREIGN OWNERSHIP, FOREIGN SUBSIDIARIES, FOREIGN SUBSIDIARY, GOVERNANCE INDICATORS, GOVERNMENT REGULATIONS, INTELLECTUAL PROPERTY, INTELLECTUAL PROPERTY RIGHTS, INTERMEDIATE INPUTS, INTERNATIONAL ECONOMICS, INTERNATIONAL INVESTMENT, INTERNATIONAL TRADE, INVESTMENT CLIMATE, INVESTMENT FLOWS, INVESTMENT INCENTIVES, INVESTMENT INFLOWS, INVESTMENT LOCATION, LABOR COSTS, LABOR MARKET, LABOR MARKET FLEXIBILITY, LABOR MARKET REGULATIONS, LABOR MARKET RIGIDITIES, LABOR MARKETS, LAWS, LEGISLATION, MARKET SIZE, MULTINATIONAL COMPANIES, POLICY RESEARCH, POLLUTION, POLLUTION ABATEMENT, PROPERTY RIGHTS, SUBSIDIARIES, SUBSIDIARY, TAX RATE, TAX RATES, TAXATION, TRANSITION COUNTRIES, TRANSITION ECONOMIES, TRANSPARENCY FOREIGN DIRECT INVESTMENT, LABOR MARKETS, FOREIGN INVESTORS, INVESTORS, LABOR LAWS, LABOR REGULATIONS, BUSINESS FINANCING, LABOR INFORMATION, COLLECTIVE ACTIONS, SEVERANCE PAYMENTS, TRANSITION ECONOMIES, SERVICES