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Labor law and innovation revisited

Bill B. Francis, Incheol Kim, Bin Wang and Zhengyi Zhang

Journal of Banking & Finance, 2018, vol. 94, issue C, 1-15

Abstract: This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in (1) firms that heavily rely on external financing, (2) firms that have high R&D intensity, (3) manufacturing industries, and (4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation.

Keywords: Employment protection laws; Labor law reform; Corporate innovation; Inventor turnover (search for similar items in EconPapers)
JEL-codes: F30 J5 J8 K31 O31 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:1-15