Foreign direct investment, investment incentives, and firing costs: A disadvantage for "inflexible Europe"?

Abstract

Investment incentives targeted at attracting multinational firms have been extensively documented and researched, and empirical evidence has shown them to be influential. The same is not true of exit costs. Yet, as recent theory suggests, there may be a trade-off between entry incentives and costs of exit, for example, due to employment protection. This paper focuses on just that trade-off in the case of US multinationals in 33 host countries. Our results suggest that both entry incentives and firing costs are important and ignoring the latter neglects an important dimension in firms’ location decision. This has implications for Europe as a location for FDI, as European labor markets are generally considered relatively inflexible compared to, for example, the US.