Abstract
Foreign direct investment is one mode of entry into international markets that can provide important benefits to host economies. For this reason, policymakers have sought to apply policies that attract foreign direct investment. Although there is extensive and relevant literature that explores the determinants of foreign direct investment, few studies exist that focus on the relationship between labour market flexibility and foreign direct investment; furthermore, most of these are firm-level studies and use old data. Thus, this study aims to analyze the influence of labour market flexibility on foreign direct investment based on macroeconomic data for a set of 180 countries and a relatively recent period of analysis (2004-2009). Using econometric techniques with panel data, the results show that labour market flexibility enhances the attraction of foreign direct investment. In particular, the rigidity of working hours is the dimension of labour market regulations that most negatively affects the attraction of foreign direct investment. Based on the control variables used, we found that the economic and financial incentives, trade barriers, the growth and the size of the market and the level of human capital are important determinants in the explanation of foreign direct investment patterns.
Highlights
In the extensive literature of the determinants of foreign direct investment, we find a large group of variables capable of influencing the attraction of Foreign direct investment (FDI)
Foreign direct investment is an important tool for economic growth of host economies and allows for the creation of new jobs and the introduction of new technologies
Since the deregulation of the labour market is one of these policies, it is useful to analyse its effects on foreign direct investment
Summary
Countries actively compete to attract investment from multinational companies. Governments of host economies tend to implement policies to increase labour market flexibility and by doing so increase the attractiveness of their countries to foreign investors (Mogab, Kishan, and Vacaflores 2013). Haaland and Ian Wooton (2002) who through a theoretical model focus on market uncertainty that leads companies to take into account exit costs from a particular country. These authors argue that countries with labour markets featured by reduced firing rules and low exit costs tend to attract higher FDI inflows. Groups: studies at firm and industry levels and studies at country level (macroeconomic studies)
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