Do Foreign Investors Care About Labor Market Regulations?

26 Pages Posted: 26 Apr 2005

See all articles by Beata Smarzynska Javorcik

Beata Smarzynska Javorcik

University of Oxford - Department of Economics; World Bank - Development Research Group (DECRG); Centre for Economic Policy Research (CEPR)

Mariana Spatareanu

Rutgers University Department of Economics and Division of Global Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

This study takes a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labor 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 labor 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 labor 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 labor 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 labor market regulations than investment in manufacturing.

Keywords: Foreign direct investment, labor market regulation, firm-level data

JEL Classification: F21, F23, J00

Suggested Citation

Javorcik, Beata Smarzynska and Spatareanu, Mariana, Do Foreign Investors Care About Labor Market Regulations? (January 2005). Available at SSRN: https://ssrn.com/abstract=711189

Beata Smarzynska Javorcik (Contact Author)

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Mariana Spatareanu

Rutgers University Department of Economics and Division of Global Affairs ( email )

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