It is often argued that countries with more flexible labor markets are better placed in attracting inward investment from multinational firms (MNEs). This is an issue when there is uncertainty in the marketplace and the firm faces some risk of closure of its branch plant. We study the MNE's location choice, explicitly taking into account exit, as well as entry, costs. We show that worker protection, through lay-off rules, deters potential investment in risky industries. Using evidence on MNE investment in Eastern Europe, we find support for our prediction that labor-market flexibility makes a location more attractive to the MNE.
- multinational firms