Working Paper No. 935

Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data

Published: October 25, 2012Pages: 47Keywords: Labor market institutions; Firm heterogeneity; Oligopoly; Platform-FDI; Horizontal-FDI, Micro dataJEL-codes: F23, J80, C20

Employment Protection and Multinational Enterprises: Theory and Evidence from Micro Data Pehr-Johan Norbäck, Jing-Lin Duanmu and Per Skedinger


In this paper we show, theoretically and empirically, that stronger employment protection legislation (EPL) in a host country has important and differing effects on the various activities of multinational enterprises (MNEs). Using micro data on affiliates to Swedish multinational firms in 20 countries for the period of 1965–1998, we find that increased stringency in EPL is associated with fewer investments in new affiliates and lower employment in existing affiliates. We also find that it is mainly affiliate exports that are affected negatively by stronger EPL, while the impact on local sales is small. This is in accordance with our theoretical model, which predicts that the impact of EPL on the costs of competing firms is likely to put affiliates at a smaller disadvantage when selling for the local market than in the production for exports.

Pehr-Johan Norbäck

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Ph: +46 8 665 4522
Mob: +46 73 547 3379
pehr-johan.norback@if...

Per Skedinger

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Ph: +46 8 665 4553
per.skedinger@ifn.se

An Agenda for Europe

Institutional Reform for Innovation and Entrepreneurship

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The authors of this book, Niklas Elert, Magnus Henrekson and Mikael Stenkula, advise the economies of the European Union to become more entrepreneurial in promoting innovation and economic growth. The authors propose a reform strategy with respect to several aspects to achieve this goal.

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