Do Foreign Investors Care About Labour Market Regulations?

Beata Javorcik and Mariana Spatareanu

No 4839, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This study takes a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labour market flexibility affects FDI flows across 19 Western and Eastern European countries. The analysis is based on firm-level data on new investments undertaken during the 1998-2001 period. The study employs a variety of proxies for labour market regulations reflecting the flexibility of individual and collective dismissals, the length of the notice period and the required severance payment along with a comprehensive set of controls for the business climate characteristics. The results suggest that greater flexibility in the host country?s labour market in absolute terms or relative to that in the investor?s home country is associated with larger FDI flows. The findings indicate that as the labour market flexibility in the host country increases from inflexible (e.g. France) to flexible (e.g. United Kingdom), the volume of investment goes up by between 12% and 26%. FDI in services sectors appears to be more sensitive to labour market regulations than investment in manufacturing.

Keywords: Foreign direct investment; Labour market regulation; Firm-level data (search for similar items in EconPapers)
JEL-codes: F21 F23 J00 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-eec and nep-reg
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Citations: View citations in EconPapers (98)

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Journal Article: Do Foreign Investors Care about Labor Market Regulations? (2005)
Working Paper: Do foreign investors care about labor market regulations? (2004)
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