Labor market institutions and firms' location choices

• Published in: Review of world economics Vol. 150; no. 1; pp. 115 - 148
• Main Authors: Delbecque, Vincent, Méjean, Isabelle, Patureau, Lise
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer 01.02.2014; Springer Berlin Heidelberg; Springer Nature B.V
• Subjects: Bargaining; Datasets; Economic freedom; Economic models; Economic Policy; Economic statistics; Economic theory; Economics; Economics and Finance; Employment; European Integration; Expansion; Financial investments; Foreign direct investment; Foreign investment; Global economy; Globalization; International; International Economics; Investors; Labor costs; Labor economics; Labor law; Labor market; Labor markets; Labor unions; Labour law; Labour market; Location of industry; Macroeconomics/Monetary Economics//Financial Economics; Market potential; Minimum wage; Original Paper; Price rigidities; Probability; Studies; Unemployment; Unemployment insurance; Wages & salaries; Conditional logit analysis; F21; Labor market institutions; Foreign direct investment determinants; J32; Firm-level data; F16
• ISSN: 1610-2878; 1610-2886
• DOI: 10.1007/s10290-013-0173-2

The paper evaluates the empirical effects of labor market institutions (LMI) on foreign direct investment (FDI) decisions using an individual dataset describing French firms' expansion strategies in OECD countries over 1992-2002. First, we provide evidence that labor market institutions do matter in location decisions. Precisely, we show that labor market rigidity significantly reduces the country's attractiveness for foreign investors. Yet, the effect is of limited magnitude compared to FDI determinants related to the country's market potential or supply access. Second, we go deeper in the precise role of various LMI dimensions. In line with the literature, we find that stringent employment protection laws have a dampening effect on the location probability. Besides, we show that this is not the only dimension that matters. In particular, we find that the generosity of the unemployment benefit system plays a significant negative role on the country's attractiveness, even once the role of employment protection is controlled for.