Is the World Flat? Differential Regulation of Domestic and Foreign-Owned Firms

Elizabeth Asiedu and Hadi Salehi Esfahani ()
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Elizabeth Asiedu: Department of Economics, The University of Kansas

No 200703, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: This paper examines the determinants of differential employment restrictions applied to foreign vs. domestic firms. We develop a model of employment regulation and test its implications using data from the World Bank's World Business Environment Survey, conducted in 1999/2000. We find that while democratic accountability, corruption, and British legal origin reduce the extent of government intervention in firms' employment decision, they give greater advantage to domestic relative to foreign investors. Rule of law, on the other hand, has a more even effect. Better investment opportunities in the country enhance the government's bargaining power vis-à-vis investors and increase employment intervention, especially in foreign firms engaged in less tradable sectors. We also identify a host of other factors that influence employment restrictions, though none of them entail a differential impact on foreign investors. We find that after controlling for other factors, foreign investors in Latin America face a greater regulatory disadvantage vis-à-vis locals compared to other regions of the world, though this is partly counterbalanced by other effects captured in the model.

Keywords: Employment Regulation; Foreign Direct Investment; Political Economy. (search for similar items in EconPapers)
JEL-codes: L5 F23 O2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-reg
Date: 2007-07

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Journal Article: Is the world flat?: Differential regulation of domestic and foreign-owned firms (2008)
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