Employment Protection and Relocation with Firm Heterogeneity : Department of Economics, Finance and Accounting Discussion Papers Series, N234-13

This paper examines the determinants of the decision to relocate activities abroad for firms that are located in 29 OECD countries. Our theoretical model suggests that firm heterogeneity plays a crucial role for the link between employment protection and relocation. Stricter employment protection laws in the home country discourages firms’ relocation activity. While larger, more productive firms and firms with higher labour intensities have, ceteris paribus, higher propensities to relocate, these firms also face higher exit barriers if the country from which they consider relocating has strict employment protection laws. Our theoretical predictions are supported empirically, with consistent results for firms operating in the manufacturing sector