Abstract
At a time of intensifying uncertainty, managerial flexibility to adapt to changes in the economic environment is increasingly important. Different business locations, it is frequently argued, offer this flexibility to differing degrees, labor law being one essential factor in determining the resulting attractiveness of a country as a business location. This paper takes an options perspective in order to grasp the potential effect of labor law on location decisions. The option value of an investment, it is argued, is influenced, among other factors, by labor law provisions. Depending on their preference for a certain set of options, different investors will prefer different labor market settings. The ability of the options perspective to assess the role of labor law for the attractiveness of international business locations is exemplified in a British‐German comparison and confronted with data on the composition of foreign direct investment in the two countries.
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