Labor Market Flexibility as a Determinant of FDI Inflows

This paper shows that labor market flexibility, measured by labor market standards and regulations, has two opposing effects on FDI inflows. Labor market regulations and standards decrease FDI inflows through the cost channel, but they increase FDI inflows through the productivity channel. Allowing for a non-linear relationship between different indicators of labor market flexibility and FDI inflows revealed that some degree of labor market standards and regulations may be attractive for foreign investors. Results strongly suggest that foreign investments to and from different countries and in different sectors are affected differently by different aspects of labor market standards and regulations.