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Labor Market Flexibility and Inward Foreign Direct Investment:Incentive or Outcome?

Author

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  • Isao KAMATA
Abstract
Are inward FDI and its increase related to the domestic labor market conditions in the host economy? This is still an open question, as literature to date has provided mixed evidence. This paper empirically addresses this question by testing the debated relationship in both possible “causal” directions—i.e., testing (i) whether the host’s labor market flexibility—or strictness—leads an increase in inward FDI and (ii) whether it follows inward FDI, using publicly accessible macro-level data. The first set of estimation shows that a host country with relaxed employment protection tends to attract more inward FDI, which is consistent with the findings in some recent studies. The analysis also indicates that this relationship should chiefly be the case in the “traditional” OECD members but may not apply to other countries. On the other hand, the second set of estimation indicates that increased inward FDI could result in loosened employment protection. This impact may not be immediately apparent but could be more significant in a longer time horizon.

Suggested Citation

  • Isao KAMATA, 2021. "Labor Market Flexibility and Inward Foreign Direct Investment:Incentive or Outcome?," Discussion papers e-20-007, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-20-007
    as

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    File URL: http://www.econ.kyoto-u.ac.jp/dp/papers/e-20-007.pdf
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    References listed on IDEAS

    as
    1. Beata Smarzynska Javorcik & Mariana Spatareanu, 2005. "Do Foreign Investors Care about Labor Market Regulations?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(3), pages 375-403, October.
    2. KAMATA Isao, 2014. "Regional Trade Agreements with Labor Clauses: Effects on labor standards and trade," Discussion papers 14012, Research Institute of Economy, Trade and Industry (RIETI).
    3. Davies, Ronald B. & Vadlamannati, Krishna Chaitanya, 2013. "A race to the bottom in labor standards? An empirical investigation," Journal of Development Economics, Elsevier, vol. 103(C), pages 1-14.
    4. David KUCERA, 2002. "Core labour standards and foreign direct investment," International Labour Review, International Labour Organization, vol. 141(1-2), pages 31-69, March.
    5. Timothy Besley & Robin Burgess, 2004. "Can Labor Regulation Hinder Economic Performance? Evidence from India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 91-134.
    6. Olney, William W., 2013. "A race to the bottom? Employment protection and foreign direct investment," Journal of International Economics, Elsevier, vol. 91(2), pages 191-203.
    7. Gerda Dewit & Holger Görg & Catia Montagna, 2009. "Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(1), pages 93-110, April.
    8. Neumayer, Eric & Soysa, Indra de, 2006. "Globalization and the Right to Free Association and Collective Bargaining: An Empirical Analysis," World Development, Elsevier, vol. 34(1), pages 31-49, January.
    9. Kamata, Isao, 2018. "Can RTA labor provisions prevent the deterioration of domestic labor standards? : the cases of statutory minimum wages and employment protection regulations," IDE Discussion Papers 716, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Foreign direct investment; Labor market flexibility; Labor conditions; Employment protection;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • J80 - Labor and Demographic Economics - - Labor Standards - - - General

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