Labour Market Flexibility and FDI Attraction: A Macroeconomic Analysis

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.

Keywords: Foreign direct investment, Location determinants, Labour market flexibility, Labour regulations.

JEL: F21, J80.