Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 935: Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data

Pehr-Johan Norbäck (), Jing-Lin Duanmu and Per Skedinger ()
Additional contact information
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Jing-Lin Duanmu: School of Management, Postal: University of Surrey, United Kingdom
Per Skedinger: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: In this paper we show, theoretically and empirically, that stronger employment protection legislation (EPL) in a host country has important and differing effects on the various activities of multinational enterprises (MNEs). Using micro data on affiliates to Swedish multinational firms in 20 countries for the period of 1965–1998, we find that increased stringency in EPL is associated with fewer investments in new affiliates and lower employment in existing affiliates. We also find that it is mainly affiliate exports that are affected negatively by stronger EPL, while the impact on local sales is small. This is in accordance with our theoretical model, which predicts that the impact of EPL on the costs of competing firms is likely to put affiliates at a smaller disadvantage when selling for the local market than in the production for exports.

Keywords: Labor market institutions; Firm heterogeneity; Oligopoly; Platform-FDI; Horizontal-FDI; Micro data

JEL-codes: C20; F23; J80

47 pages, October 25, 2012

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