This study examines the impact of strengthening employment protection legislation, the structure of collective bargaining (centralization and coordination) and other labor market variables (national levels of unionization, strike levels and tax wedges on labor income) on a country's FDI inflows. Examining 29 OECD nations, our statistical analysis shows that strict EPL, which increases labor market rigidity, is usually associated with lower levels of FDI shares. Japanese investors are more sensitive to employment protection measures in choosing destinations for FDI than others. A 1-percentage-point increase in EPL causes a decrease of about 4.2 percent to Japan's FDI share, compared to the decrease of 2.2 percent that results in the worldwide share. Finally, we discuss the implications of the recent employment protection policies in Korea that focus only on the interests of 'inside' labor, reducing FDI inflows as well as neglecting the interests of 'outside' labor (unemployed and future labor). Thus, policies for spending on outside labor and promoting entrepreneurship are necessary for national welfare to increase.

I. Introduction

II. Labor Market Institutions and Economic Outcomes

III. The Effects of Labor Market Instututions on FDI Inflows

IV. Implications and Discussions

Appendix I. Correlation Matrix

Appendix II. Employment Protection Legislation Index