Labor Law and Innovation Revisited

44 Pages Posted: 7 Nov 2015 Last revised: 13 Jun 2018

See all articles by Bill B. Francis

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Bin Wang

Marquette University - College of Business Administration

Zhengyi Zhang

Capital University of Economics and Business (CUEB) - International School of Economics and Management

Date Written: May 31, 2018

Abstract

This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in 1) firms that heavily rely on external financing, 2) firms that have high R&D intensity, 3) manufacturing industries, and 4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation.

Keywords: Employment protection laws; Labor law reform; Corporate innovation; Innovation efficiency; Inventor turnover

JEL Classification: F30, J5, J8, K31, O31

Suggested Citation

Francis, Bill B. and Kim, Incheol and Wang, Bin and Zhang, Zhengyi, Labor Law and Innovation Revisited (May 31, 2018). Journal of Banking and Finance, Forthcoming; Fordham University Schools of Business Research Paper No. 2687196. Available at SSRN: https://ssrn.com/abstract=2687196 or http://dx.doi.org/10.2139/ssrn.2687196

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Incheol Kim (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Bin Wang

Marquette University - College of Business Administration ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Zhengyi Zhang

Capital University of Economics and Business (CUEB) - International School of Economics and Management ( email )

Beijing
China

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