Rate of return on foreign investment income and employment labour protection : a panel analysis of thirty OECD countries

Scholars argue that multinational corporations tend to locate their investments in countries with lower employment protections to avoid potential future exit costs if an unfavourable event occurs. Yet, empirical results are highly inconsistent. The main objective of this study is to examine the causal relationship between rate of return on foreign investment income and employment labour protection (ELP) by employing one-step system generalized method of moments system. Strict ELP affects location choice of investments through the profit maximization appetite of foreign investors. Thus, contrary to previous studies investigating the effect of labour standards on foreign investment inflows, this study deals relationship between rate of return on foreign investment income and ELP in the host country. The study found robust evidence that ELP has no significant effect on rate of return on investment income; however, market size, GDP growth rate, openness, investment profile and inflation do indeed have a positive effect. The important implication is that the reductions in employment protection rules do not affect the location choice of foreign investors through the cost–benefit analysis on their investments.