Foreign direct investment and employment rights in South-Eastern Europe

Abstract

The dominant neoliberal policy community holds that a reduction in employment rights and social protection is likely to promote economic recovery and growth. It has been suggested that investors are likely to shun countries where such rights are strong; in contrast, radical labour market deregulation is seen as encouraging both local business and multinationals to invest. This study explores whether labour market deregulation in South-Eastern Europe has really encouraged multinationals to invest in the region. We find that the weakening of important aspects of employment rights under the law appears to detract from, rather than encourage, foreign direct investment (FDI). We also show that stronger employment rights are more likely to attract FDI when the host country is located within the European Union. This finding suggests that the complementarities associated with stronger employment rights and more committed labour may offset the overall deterrent effects of the greater regulation associated with EU membership.