The Impact of Employment Protection Legislation on FDI

In line with previous literature this paper finds that employment protection legislation, especially regulations towards regular employment, has a negative impact on the volume of inward Foreign Direct Investment. Yet, we also find that the deterrent effect of inflexible labor markets is predominantly given for industries with relatively high shares of low skilled workers employed. This result is consistent with the view that high exit costs due to strict employment protection legislation matters particularly for mobile industries like the textile, food and wood industries which continuously seek for low labor cost locations.