Labor Disputes and the Economics of Firm Geography: A Study of Domestic Investment in India

Abstract

Acrimonious relations between employers and employees in developing countries have often been cited as impediments to progress. This paper considers various measures of labor disputes, and investigates whether these have detrimental effects on the location choice of new domestic investment across the various states of India. Conventional wisdom holds that an increase in measures such as the number of strikes, the number of man-days lost in work-stoppages, and the percentage of unionized workers, would hinder the location of new projects. Using panel data and a fixed effects methodology that controls for the effect of state-specific unobservables, we find significant evidence that this is indeed the case in India. Furthermore, disaggregation by industrial classifications shows that although labor disputes continue to exert negative effects, location choices are also conditioned on other factors such as proximity to raw materials and minerals.

Keywords: Labor Regulation, Investment, Firm Location

JEL Classification: D21, J50, L0