Working Paper: CEPR ID: DP3152
Authors: Jan Haaland; Ian Wooton
Abstract: In an uncertain business climate, multinational enterprises must take account of future exit costs in deciding where to locate a branch plant. We study how differences in national labour-market conditions between countries influence this decision. Other things equal, the most attractive location has a flexible labour market (low closure costs) together with a low opportunity cost of employment (high unemployment). In a game between two countries, a nation with an inflexible labour market and high unemployment will succeed in attracting low-risk firms, while that with more flexible labour markets and low unemployment will win the game for higher risk firms.
Keywords: entry; exit; investment; subsidies; multinational firms; uncertainty
JEL Codes: D92; F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labour market flexibility (measured by redundancy payments) (J63) | MNE investment decisions (F23) |
| Opportunity cost of employment (unemployment levels) (J64) | MNE investment decisions (F23) |
| Closure costs (G33) | MNE investment decisions (F23) |
| Labour market flexibility (measured by redundancy payments) (J63) | Attractiveness to MNEs (F23) |
| Opportunity cost of employment (unemployment levels) (J64) | Attractiveness to MNEs (F23) |
| Inflexible labour markets and high unemployment (F66) | Attract low-risk firms (R38) |
| Flexible labour markets and low unemployment (J60) | Attract higher-risk firms (G24) |