published as 'Should I stay or should I go? Foreign direct investment, employment protection and domestic anchorage' in: Review of World Economics, 145 (1), 2009, 93-110
This paper examines how employment protection legislation affects location decisions of
multinationals. Based on a simple theoretical framework, we estimate an empirical model,
using OECD-data on bilateral FDI-flows and employment protection indices. We find that,
while an “unfavourable” employment protection differential between a domestic and a foreign
location is inimical to foreign direct investment (FDI), a high domestic level of employment
protection tends to discourage outward FDI. The results are in line with our conjecture that
strict employment protection in the firm’s home country makes firms reluctant to relocate
abroad and keeps them “anchored” at home.
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