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Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage

[journal article]

Dewit, Gerda
Görg, Holger
Montagna, Catia

Abstract

This paper examines theoretically and empirically how employment protection legislation affects location decisions of multinationals. We depart from the "conventional wisdom" by examining not only the effect of protection on inward foreign direct investment (FDI), but also a country's ability to "an... view more

This paper examines theoretically and empirically how employment protection legislation affects location decisions of multinationals. We depart from the "conventional wisdom" by examining not only the effect of protection on inward foreign direct investment (FDI), but also a country's ability to "anchor" potential outward investment. Based on our simple theoretical framework, we estimate an empirical model, using data on bilateral FDI and employment protection indices for OECD countries, and controlling for other labour market institutions and investment costs. We find that, while an "unfavourable" employment protection differential between a domestic and a foreign location is inimical to FDI, a high domestic level of employment protection tends to discourage outward FDI. The results are in line with our conjecture that strict employment protection in the firm's home country makes firms reluctant to relocate abroad and keeps them "anchored" at home.... view less

Classification
Political Economy
Labor Market Research

Free Keywords
Foreign direct investment; Employment protection; Domestic anchorage; Uncertainty; F23; J80; D80

Document language
English

Publication Year
2009

Page/Pages
p. 93-110

Journal
Review of World Economics, 145 (2009) 1

DOI
https://doi.org/10.1007/s10290-009-0001-x

Status
Postprint; peer reviewed

Licence
PEER Licence Agreement (applicable only to documents from PEER project)


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