The Determinants of Foreign Direct Investment Employment Restrictions

Abstract

This paper examines the determinants of FDI employment restrictions. We construct a political economy model where the TNE and the government have different objective functions: the TNE maximizes profits, and the host government cares about tax revenue and local employment. We show that the level of employment preferred by the government exceeds the level preferred by the TNE - the divergence in preferences motivates the government to impose restrictions. We test the implications of the model using data on employment restrictions derived from the World Bank's World Business Environment Survey conducted in 1999/2000. The analysis employs data for up to 1147 foreign-owned firms operating in 44 countries.

Keywords: Employment, Foregn Direct Investment, Restrictions

JEL Classification: D2, F1, F2