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

William Olney
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William Olney: Williams College
Authors registered in the RePEc Author Service: Quamrul H. Ashraf, Boris Gershman and Peter Howitt (peter_howitt@brown.edu)

No 2011-02, Department of Economics Working Papers from Department of Economics, Williams College

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.

Keywords: Foreign direct investment; Employment protection; Race to the bottom (search for similar items in EconPapers)
JEL-codes: F16 F23 J80 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2010-11, Revised 2013-08
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Citations: View citations in EconPapers (12)

Published in the Journal of International Economics, 91(2): 191-203.

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