The effect of EPL on the internationalization of small firms

Teresa Barbieri (), Francesco Devicienti (), Alessandro Manello () and Davide Vannoni
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Teresa Barbieri: Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS), University of Torino, Italy;
Alessandro Manello: Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS), University of Torino, Italy; IRCrES - CNR;

No 78, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

Abstract: A broad economic literature has evaluated the impact of employment protection legislation (EPL) on various firm-level outcomes. We complement this literature by studying the effect of a reduction in employment protection on the internationalization of small firms. Exploiting a comprehensive survey on Italian firms, we assess how small firms' engagement in international activities has been affected by the 2012 Labor Market Reform, the so-called "Fornero Law", that reduced firing costs for firms above the 15-employee threshold. Using a difference-in-differences identification strategy, we find a positive effect of EPL retrenchment on small firms' inward and outward FDI, whereas we cannot identify an effect on their exporting activities. The evidence we provide shows that increasing labor market flexibilization attracts foreign capital and encourages firms' outward investment. We document minor heterogeneous effects by geographic areas but no heterogeneity across different sectors of economic activity. Finally, the positive effect on internationalization is greater in firms with a higher level of volatility.

Keywords: EPL; Internationalization; FDI; Small Firms; Labor Market Reform; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: F16 F21 J08 J63 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-11
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