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Financial Development, Labor and Market Regulations and Growth

Raquel Fonseca () and Natalia Utrero-González ()

No 503, Working Papers from Departament Empresa, Universitat Autònoma de Barcelona

Abstract: This paper investigates the importance that market regulation and fnancial imperfections have on firm growth. We analyse institutions affecting labor market as Employment Protection Laws (EP) and Product Market Regulation (PM). We show that together with the beneficial effects of financial development, a firm will get less financing, and thus invest less, in a weak financial market (finance effect), the strictness of product and labor market regulations also affect firm growth (labor effect). In particular, we show that the stricter the rules the more detrimental the influence on growth in sectoral value added for a large number of countries. We also show that the labor effect overcomes the positive finance effect.

Date: 2005-04, Revised 2005-04
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Published in Working Papers at the Department of Business, May 2005 pages 1-36

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