Labor Market Flexibility and FDI : Evidence from OECD Countries

This paper examines the impact of labor market regulations on FDI and employment and production of the foreign firms using an index on employment protection along with a number of employees and establishments, and production of foreign affiliates provided by the OECD. The empirical results show that strict employment protection discourages initial entry of foreign firms as well as the employment and production of foreign firms. The result is robust to various specifications in which the strictness of the labor market is measured by the unionization rate and severance pay for redundancy dismissal. Therefore, the attention of policymakers should not be limited to tax incentives, cash grants, and relaxation of market regulations but extend also to labor market deregulation and non-wage cost, to attract more foreign firms into their countries