Is the World Flat? Differential Regulation of Domestic and Foreign-Owned Firms

29 Pages Posted: 8 Dec 2006

See all articles by Elizabeth Asiedu

Elizabeth Asiedu

Howard University - Department of Economics

Hadi Salehi Esfahani

University of Illinois at Urbana-Champaign

Date Written: November 27, 2006

Abstract

This paper examines the determinants of differential employment restrictions applied to foreign vs. domestic firms. We develop a model of employment regulation and test its implications using data from the World Bank's World Business Environment Survey, conducted in 1999/2000. We find that while democratic accountability, corruption, and British legal origin reduce the extent of government intervention in firms' employment decision, they give greater advantage to domestic relative to foreign investors. Rule of law, on the other hand, has a more even effect. Better investment opportunities in the country enhance the government's bargaining power vis-à-vis investors and increase employment intervention, especially in foreign firms engaged in less tradable sectors. We also identify a host of other factors that influence employment restrictions, though none of them entail a differential impact on foreign investors. We find that after controlling for other factors, foreign investors in Latin America face a greater regulatory disadvantage vis-à-vis locals compared to other regions of the world, though this is partly counterbalanced by other effects captured in the model.

Keywords: Employment Regulation, Foreign Direct Investment, Political Economy

JEL Classification: L5, F23, O2

Suggested Citation

Asiedu, Elizabeth and Esfahani, Hadi Salehi, Is the World Flat? Differential Regulation of Domestic and Foreign-Owned Firms (November 27, 2006). Available at SSRN: https://ssrn.com/abstract=950217 or http://dx.doi.org/10.2139/ssrn.950217

Elizabeth Asiedu (Contact Author)

Howard University - Department of Economics

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Washington, DC 20059
United States

Hadi Salehi Esfahani

University of Illinois at Urbana-Champaign ( email )

Department of Economics
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Champaign, IL 61820
United States
217-333-2681 (Phone)
217-333-1398 (Fax)

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