Fancy a stay at the 'Hotel California'? the role of easy entry and exit for FDI

Abstract

Investment incentives targeted at attracting multinational firms have been extensively researched, and empirical evidence has shown them to be influential. The same is not true of exit restrictions. Yet, as recent theory suggests, there may be a trade-off between entry incentives and ease of exit. This paper focuses on that trade-off in the case of US multinationals in 33 host countries. An indicator of labour market regulations is used as a measure of ease of exit. Results suggest that both entry incentives and labour market regulations are important and ignoring the latter neglects an important dimension in firms' location decision. © 2005 Blackwell Publishing Ltd.