Working Paper: CEPR ID: DP4839
Authors: Beata Smarzynska Javorcik; Mariana Spatareanu
Abstract: This study takes a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labour market flexibility affects FDI flows across 19 Western and Eastern European countries. The analysis is based on firm-level data on new investments undertaken during the 1998-2001 period. The study employs a variety of proxies for labour market regulations reflecting the flexibility of individual and collective dismissals, the length of the notice period and the required severance payment along with a comprehensive set of controls for the business climate characteristics. The results suggest that greater flexibility in the host country?s labour market in absolute terms or relative to that in the investor?s home country is associated with larger FDI flows. The findings indicate that as the labour market flexibility in the host country increases from inflexible (e.g. France) to flexible (e.g. United Kingdom), the volume of investment goes up by between 12% and 26%. FDI in services sectors appears to be more sensitive to labour market regulations than investment in manufacturing.
Keywords: Firm-level data; Foreign direct investment; Labour market regulation
JEL Codes: F21; F23; J00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor Market Flexibility (Host) (J61) | FDI Sensitivity (Services Sector) (F23) |
| Labor Market Flexibility (Host) (J61) | FDI Sensitivity (Manufacturing Sector) (F23) |
| Labor Market Flexibility (Host) Relative to Home (J61) | FDI Investment (F21) |
| Labor Market Flexibility (J48) | Probability of FDI Investment (F21) |
| Labor Market Flexibility (J48) | Volume of FDI Investment (F21) |