Labor Market Rigidity And Foreign Direct Investment: The Case Of Europe

Abstract

This paper examines the relationship between labor market rigidity and FDI decisions by Europeans multi-nationals firms during 2004-2008. We use firm-level data for European Multinational Enterprises investment in 41 European countries during these four years. Using conditional fixed effect logit and Tobit estimations, we show that European MNEs generally respond to regulatory, gravity and firm specific indicators in the expected ways, but their responses to changes in labor market institutions are less consistent. We also find that the relationship between MNEs location decision and host country’s labor market institutional factors is sensitive to host country’s development stage and market integration with the EU countries.