Do foreign investors care about labor market regulations?

Beata Smarzynska and Mariana Spartareanu
Authors registered in the RePEc Author Service: Beata Smarzynska Javorcik and Mariana Spatareanu

No 3275, Policy Research Working Paper Series from The World Bank

Abstract: The authors take a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labor market flexibility affects FDI flows across 25 Western and Eastern European countries. Their analysis is based on firm level data on new investments during the 1999-2001 period. The authors employ a variety of labor market flexibility measures that capture different aspects of labor laws along with a comprehensive set of controls for business climate characteristics. Indices of labor market regulations reflect the flexibility of individual and collective dismissals, the length of the notice period, and the required severance payment. The results suggest that greater flexibility in the host country's labor market relative to that in the investor's home country is associated with larger FDI inflows, and this effect is found to be stronger in the case of transition economies. The findings indicate that as the labor market flexibility in the host country increases from inflexible (for example, Slovakia) to flexible (for example, Hungary), the volume of investment increases by between 14 and 18 percent. FDI in service sectors appears to be more affected than investments in manufacturing.

Keywords: Environmental Economics&Policies; Banks&Banking Reform; Municipal Financial Management; Labor Policies; Labor Markets; Environmental Economics&Policies; Banks&Banking Reform; Trade and Regional Integration; Health Economics&Finance; National Governance (search for similar items in EconPapers)
Date: 2004-04-01
New Economics Papers: this item is included in nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Do Foreign Investors Care about Labor Market Regulations? (2005)
Working Paper: Do Foreign Investors Care About Labour Market Regulations? (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:3275

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