Does the Impact of Employment Protection Legislation on Foreign Direct Investment Differ by the Skill Intensity of Industries? An Empirical Note

Bellak, Christian; Leibrecht, Markus

doi:10.1111/j.1467-9701.2011.01394.x

Cited by 12 publications

(17 citation statements)

References 26 publications

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“…Examples of the latter are Bellak and Leibrecht (2011), Benassy‐Quéré et al. (2007), Dewit et al (2007), Görg (2005) and Gross and Ryan (2008), who all find that FDI is hampered by more stringent EPL.…”

Section: Relation To the Literaturementioning

confidence: 99%

“…Examples of the latter are Bellak andLeibrecht (2011), Benassy-Quéré et al (2007), Dewit et al (2007), Görg (2005) and Gross and Ryan (2008), who all find that FDI is hampered by more stringent EPL. Bellak and Leibrecht (2011) also find evidence of heterogeneous effects across sectors; stricter EPL discourages FDI mostly in low-skill intensive industries. Javorcik and Spatareanu (2005) and Lafontaine and Sivadasan (2009) use firm-level data as we do, but do not distinguish between the various activities of MNEs.…”

Section: Relation To the Literaturementioning

confidence: 99%

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Employment protection and FDI revisited: New evidence from micro data*

2021

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Many countries attempt to attract foreign direct investments (FDI), since potential host countries recognise that FDI can improve the productive efficiency of the business sector. Not only do multinational firms (MNEs) pay higher wages than indigenous firms, they are also more productive and do more R&D. Increasing globalisation and volatility of employment may, however, also increase the demand for job security. A conflict may then arise between the host country government's ambition to protect employment and its ambition to attract FDI. In this paper, we reexamine how FDI is affected by the stringency of employment protection legislation (EPL) in the host country using affiliate micro data on outward investments by Swedish multinational firms. Investigating the relationship between EPL and FDI is challenging for at least three reasons: First, it seems intuitive that more stringent EPL increases labour costs, for example, in the form of severance pay, since it becomes costlier to dismiss workers. This effect is reinforced if stronger EPL improves the bargaining position of workers and hence increases their wage demands. However, there are also mechanisms through which stronger EPL can reduce wages. For instance, Lazear (1990) has suggested that more job security may contribute to lower wages, and possibly leave total labour costs unchanged, if employers can shift increased dismissal costs onto workers. Thus, the relationship between more stringent EPL and labour costs-and hence also the relationship between EPL and FDI-is ambiguous a priori. 1 Second, the term FDI refers to multiple decisions made by a multinational firm. These may involve investing into a new affiliate or deciding on employment and sales in an existing affiliate, where some sales may be destined to markets outside the host country market as exports. The impact of more stringent EPL on these decisions may not be uniform. Finally, FDI may trigger reforms of EPL in host countries and these policies are not decided upon in isolation of other labour market policies, or economic policy in general. To identify the effect of more stringent EPL on the activities of MNEs, we use a micro dataset on affiliates of Swedish multinational firms for the period 1965-1998. We estimate regression equations for the investment decision of establishing new affiliates (extensive margin), affiliate employment, local sales and affiliate export sales (intensive margin). To examine the impact of the stringency of EPL in the host 1 If employers incur firing costs in excess of benefits accruing to workers, in the form of red tape and legal costs, these additional costs cannot be undone in wage bargaining and thus contribute to lowering employment (Burda, 1992).

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Section: Relation To the Literaturementioning

confidence: 99%

Section: Relation To the Literaturementioning

confidence: 99%

Employment protection and FDI revisited: New evidence from micro data*

2021

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“…Second, foreign investors may not only seek low labour costs but also qualified workers; thus, a flexible labour market may help the firm to align its labour force with more productive techniques. The studies of Keller and Levinson (2002), Harms and Ursprung (2002), Kucera (2002), Busse (2003), Dewit, Görg, and Montagna (2003), Gorg (2005), Javorcik and Spatareanu (2005), Drezner (2006), Delbecque, Méjean, and Patureau (2007), Ham and Kleiner (2007), Olney (2011), Bellak andLeibrecht (2011), Radulescu andRobson (2013) and Duanmu (2014), Fournier (2015) have argued that MNFs may tend to increase their profits by investing in countries with less restrictive standards. Additionally, a hand full of study has argued that deterring effect of ELP on foreign investments may change with respect to the sectoral differences where FDI directed.…”

Section: Theoretical Considerations and Literature Reviewmentioning

confidence: 99%

“…Additionally, a hand full of study has argued that deterring effect of ELP on foreign investments may change with respect to the sectoral differences where FDI directed. Bellak and Leibrecht (2011) have claimed that the deterrent effect of rigid labour markets depend on the skill intensity of an industry. Furthermore, Krzywdzinski (2014) analysed the determinants of capital flows into European countries and compared the German and USA FDI in the automotive and chemical industry.…”

Section: Theoretical Considerations and Literature Reviewmentioning

confidence: 99%

Rate of return on foreign investment income and employment labour protection: A panel analysis of thirty OECD countries

Polat

2017

Cogent Economics & Finance

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Scholars argue that multinational corporations tend to locate their investments in countries with lower employment protections to avoid potential future exit costs if an unfavourable event occurs. Yet, empirical results are highly inconsistent. The main objective of this study is to examine the causal relationship between rate of return on foreign investment income and employment labour protection (ELP) by employing one-step system generalized method of moments system. Strict ELP affects location choice of investments through the profit maximization appetite of foreign investors. Thus, contrary to previous studies investigating the effect of labour standards on foreign investment inflows, this study deals relationship between rate of return on foreign investment income and ELP in the host country. The study found robust evidence that ELP has no significant effect on rate of return on investment income; however, market size, GDP growth rate, openness, investment profile and inflation do indeed have a positive effect. The important implication is that the reductions in employment protection rules do not affect the location choice of foreign investors through the cost-benefit analysis on their investments. PUBLIC INTEREST STATEMENTThe race to the bottom hypothesis claims that multinational firms (MNFs) prefer to invest in countries with less restrictive labour standards. The belief is that, in an environment of uncertainty, MNFs are likely to consider future exit costs when deciding on the location of a new investment, and a higher degree of employee labour protection (ELP) is expected to contribute to the scale of future exit costs for these firms. On the other hand, a handful of studies found positive relation between ELP and foreign direct investment (FDI) inflows or no relation at all. Even though there is a mixed evidence regarding the real effect of ELP on FDI inflows, previous studies have overwhelmingly neglected to capture any possible cost effect of ELP on the profitability of investors. Thus, it induced me to concentrate on the cost effect of ELP on rate of return on FDI inflows for OECD countries where labour rights are mostly respected.

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“…Ranjan () found that the effect of trade deregulation on wage is determined by labour market institutions. Moreover, in recent empirical studies, Sly and Soderbery () found that there is robust evidence that multinational firms strategically choose to produce in different countries in response to differences in wage bargaining (see also Bellak & Leibrecht, ).…”

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confidence: 99%

Restrictions on Foreign Investments and the Relocation of Firms

Dong

Bárcena‐Ruiz

Garzón

2015

Australian Economic Papers

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We analyse why the Chinese government sets restrictions on foreign direct investment (FDI). We focus our analysis on the percentage of shares in relocated firms that the government allows to be foreign-owned. The government's decision on this percentage depends on the entry cost, the number of firms that relocate and the weight of the consumer surplus in the objective function of the government. We show that by its choice of this percentage, the Chinese government may restrict or encourage FDI to its country. We also find that if the government may subsidise the fixed entry cost, it provides a subsidy only when the producer surplus has a greater weight than the consumer surplus in weighted welfare. In that case, the subsidy encourages relocation by both firms and permits the government to allow a lower percentage of shares to be foreign-owned in relocated firms.

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Does the Impact of Employment Protection Legislation on Foreign Direct Investment Differ by the Skill Intensity of Industries? An Empirical Note

Cited by 12 publications

References 26 publications

Employment protection and FDI revisited: New evidence from micro data*

Employment protection and FDI revisited: New evidence from micro data*

Rate of return on foreign investment income and employment labour protection: A panel analysis of thirty OECD countries

Restrictions on Foreign Investments and the Relocation of Firms

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