The effects of wrongful discharge protection on foreign multinationals: Evidence from transaction‐level data

Abstract

Using detailed micro‐level data from 1977 to 1994, we analyze the impact of employment protection measures adopted across US states on the number and the value of new inbound foreign direct investment (FDI) transactions completed by foreign‐owned companies. Our findings point to a robust negative association between the implementation of employment protection laws and both the extensive and the intensive margins of FDI in the US. When states adopt regulations that increase employers’ firing costs, FDI transactions by foreign multinational companies become less frequent and decrease in value, with stronger negative impacts in more labour‐intensive industries. There is also some evidence of diversion and spillover effects from the adoption of these measures by neighbouring states.

Foreign investment sensitivity to employment regulation: reassessing what really matters

“…, 2014; Dewit et al. , 2009; Gross and Ryan, 2008; Ham and Kleiner, 2007; Kandilov and Sense, 2016; Olney, 2013). Yet, things are far less orderly for emerging markets, where one finds reports of negative (Blanton and Blanton, 2012a; Negi and Bardhan, 2017; Payton and Woo, 2014), positive (Blanton and Blanton, 2012b; Busse et al.…”

“…, 2014; Dewit et al. , 2009; Gross and Ryan, 2008; Javorcik and Spatareanu, 2005; Kandilov and Sense, 2016; Krzywdzinski, 2014; Negi and Bardhan, 2017; Olney, 2013). Collective protections (i.e., freedom of association and collective bargaining) are far less researched with very disjointed results.…”

“…One plausible explanation is the surprising variance in the way that this variable was measured. At times, it is limited to employment security (e.g., Gross and Ryan, 2008; Kandilov and Sense, 2016), elsewhere to industrial relations (e.g., Blanton and Blanton, 2012a; Busse et al. , 2011), with additional instances of a broader strategy incorporating multiple areas (e.g., Dibben et al.…”

Employment protection, production flexibility and corporate capital spending

“…Although labour protection laws are often created out of good intentions, a strand of literature reports that these laws sometimes bring about unintended unfavourable outcomes such as stagnating innovation (Francis, Kim, Wang, & Zhang, 2018), destroying combined firm synergies (Dessaint, Golubov, & Volpin, 2017) and deteriorating agency problems (Atanassov & Kim, 2009). Meanwhile, it is an ongoing discussion how labour protection law affects corporate investment (Autor, Kerr, & Kugler, 2007; Calcagnini, Ferrando, & Giombini, 2014; Cingano, Leonardi, Messina, & Pica, 2010; Cingano, Leonardi, Messina, & Pica, 2014; Fairhurst & Serfling, 2015; Kandilov & Senses, 2016).…”

“…and deteriorating agency problems (Atanassov & Kim, 2009). Meanwhile, it is an ongoing discussion how labour protection law affects corporate investment (Autor, Kerr, & Kugler, 2007;Calcagnini, Ferrando, & Giombini, 2014;Cingano, Leonardi, Messina, & Pica, 2010;Cingano, Leonardi, Messina, & Pica, 2014;Fairhurst & Serfling, 2015;Kandilov & Senses, 2016).…”