Labor Market Flexibility and Inward Foreign Direct Investment

Are inward FDI and its increase related to the labor market conditions in the host economy? This is still an open question, as the literature to date provides mixed evidence. This paper addresses this question on the debated relationship between inward FDI and the host country's domestic labor conditions empirically by testing whether the labor market flexibility—or strictness—in a host economy contributes to an increase in inward FDI, using publicly accessible macro-level data. The results of a set of estimations show that a host country with relaxed employment protection tends to attract more inward FDI, which is consistent with the findings in some recent studies. The analysis also indicates that the detected relationship between more flexible employment protection and FDI increases should chiefly be the case in "traditional" OECD members but may not apply to other countries.