Should I stay or should I go?: Foreign direct investment, employment protection and domestic anchorage

Gerda Dewit; Holger Goerg; Catia Montagna

doi:10.1007/s10290-009-0001-x

Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage

Gerda Dewit
, Holger Goerg
, Catia Montagna

Research output: Contribution to journal › Article › peer-review

53 Citations (Scopus)

Abstract

This paper examines theoretically and empirically how employment protection legislation affects location decisions of multinationals. We depart from the "conventional wisdom" by examining not only the effect of protection on inward foreign direct investment (FDI), but also a country's ability to "anchor" potential outward investment. Based on our simple theoretical framework, we estimate an empirical model, using data on bilateral FDI and employment protection indices for OECD countries, and controlling for other labour market institutions and investment costs. We find that, while an "unfavourable" employment protection differential between a domestic and a foreign location is inimical to FDI, a high domestic level of employment protection tends to discourage outward FDI. The results are in line with our conjecture that strict employment protection in the firm's home country makes firms reluctant to relocate abroad and keeps them "anchored" at home.

Original language	English
Pages (from-to)	93-110
Number of pages	18
Journal	Review of World Economics
Volume	145
Issue number	1
DOIs	https://doi.org/10.1007/s10290-009-0001-x
Publication status	Published - Apr 2009

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth
SDG 10 Reduced Inequalities

Keywords

Foreign direct investment
Employment protection
Domestic anchorage
Uncertainty

Access to Document

10.1007/s10290-009-0001-x

Cite this

@article{9e806b7951df4054bd9519ccc0e49545,

title = "Should I stay or should I go?: Foreign direct investment, employment protection and domestic anchorage",

abstract = "This paper examines theoretically and empirically how employment protection legislation affects location decisions of multinationals. We depart from the {"}conventional wisdom{"} by examining not only the effect of protection on inward foreign direct investment (FDI), but also a country's ability to {"}anchor{"} potential outward investment. Based on our simple theoretical framework, we estimate an empirical model, using data on bilateral FDI and employment protection indices for OECD countries, and controlling for other labour market institutions and investment costs. We find that, while an {"}unfavourable{"} employment protection differential between a domestic and a foreign location is inimical to FDI, a high domestic level of employment protection tends to discourage outward FDI. The results are in line with our conjecture that strict employment protection in the firm's home country makes firms reluctant to relocate abroad and keeps them {"}anchored{"} at home.",

keywords = "Foreign direct investment, Employment protection, Domestic anchorage, Uncertainty",

author = "Gerda Dewit and Holger Goerg and Catia Montagna",

year = "2009",

month = apr,

doi = "10.1007/s10290-009-0001-x",

language = "English",

volume = "145",

pages = "93--110",

journal = "Review of World Economics",

issn = "1610-2878",

publisher = "Springer Science and Business Media Deutschland GmbH",

number = "1",

}

TY - JOUR

T1 - Should I stay or should I go?

T2 - Foreign direct investment, employment protection and domestic anchorage

AU - Dewit, Gerda

AU - Goerg, Holger

AU - Montagna, Catia

PY - 2009/4

Y1 - 2009/4

N2 - This paper examines theoretically and empirically how employment protection legislation affects location decisions of multinationals. We depart from the "conventional wisdom" by examining not only the effect of protection on inward foreign direct investment (FDI), but also a country's ability to "anchor" potential outward investment. Based on our simple theoretical framework, we estimate an empirical model, using data on bilateral FDI and employment protection indices for OECD countries, and controlling for other labour market institutions and investment costs. We find that, while an "unfavourable" employment protection differential between a domestic and a foreign location is inimical to FDI, a high domestic level of employment protection tends to discourage outward FDI. The results are in line with our conjecture that strict employment protection in the firm's home country makes firms reluctant to relocate abroad and keeps them "anchored" at home.

AB - This paper examines theoretically and empirically how employment protection legislation affects location decisions of multinationals. We depart from the "conventional wisdom" by examining not only the effect of protection on inward foreign direct investment (FDI), but also a country's ability to "anchor" potential outward investment. Based on our simple theoretical framework, we estimate an empirical model, using data on bilateral FDI and employment protection indices for OECD countries, and controlling for other labour market institutions and investment costs. We find that, while an "unfavourable" employment protection differential between a domestic and a foreign location is inimical to FDI, a high domestic level of employment protection tends to discourage outward FDI. The results are in line with our conjecture that strict employment protection in the firm's home country makes firms reluctant to relocate abroad and keeps them "anchored" at home.

KW - Foreign direct investment

KW - Employment protection

KW - Domestic anchorage

KW - Uncertainty

U2 - 10.1007/s10290-009-0001-x

DO - 10.1007/s10290-009-0001-x

M3 - Article

SN - 1610-2878

VL - 145

SP - 93

EP - 110

JO - Review of World Economics

JF - Review of World Economics

IS - 1