The impact of employment protection on FDI at different stages of economic development

Sulistiyo K. Ardiyono and Arianto Patunru

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: There has been much debate on how to design employment protection regulations that balance the need to attract FDI on the one hand and to protect workers’rights on the other hand.This study explores this ‘dilemma’, using a multi-country dataset for2003to 2015and treating hiring and firing regulation and the other explanatory variables as endogenous.The findings indicate that flexible hiring and firing regulations (HFRs) is essential for FDI promotion in the early stages of economic development of a country; but the impact of labour market flexibility on FDI gradually decreases and eventually turns statistically insignificant with economic advancement. In other words, a flexible HFRs are more important for developing countries, but such flexibility does not have to be sustained in a ‘race to the bottom’ manner: once a country reaches higher income levels, it has more room to focus on labour standards to protect workers without compromising on the attractiveness of the country for FDI.

Keywords: FDI; industrial policy; labour market flexibility; economic development. (search for similar items in EconPapers)
JEL-codes: F21 J58 O24 O25 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021
New Economics Papers: this item is included in nep-int
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Journal Article: The impact of employment protection on FDI at different stages of economic development (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pas:papers:2021-18

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