Do foreign investors care about labor market regulations?

Abstract

This study investigates whether labor market flexibility affects foreign direct investment (FDI) flows across 19 Western and Eastern European countries. The analysis uses firm level data on new investments undertaken in the period 1998-2001. 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 controls for 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 inflows. © 2005 Kiel Institute for World Economics.