DP7628 Employment Protection Legislation, Multinational Firms and Innovation

Author(s): Rachel Griffith, Gareth Macartney
Publication Date: January 2010
Keyword(s): employment protection, Innovation, multinational firm location
JEL(s): D21, F23, J24, O31
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7628

The theoretical effects of labour regulations such as employment protection legislation (EPL) on innovation is ambiguous, and empirical evidence has thus far been inconclusive. EPL increases job security and the greater enforceability of job contracts may increase worker investment in innovative activity. On the other hand EPL increases adjustment costs faced by firms, and this may lead to under-investment in activities that are likely to require adjustment, including technologically advanced innovation. In this paper we find empirical evidence that both effects are at work - multinational enterprises locate more innovative activity in countries with high EPL, however they locate more technologically advanced innovation in countries with low EPL.