Is the world flat?. Differential regulation of domestic and foreign-owned firms

Elizabeth Asiedu, Hadi Salehi Esfahani

Research output: Contribution to journalArticlepeer-review


This paper examines the determinants of differential employment restrictions applied to foreign versus 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.

Original languageEnglish (US)
Pages (from-to)389-411
Number of pages23
JournalQuarterly Review of Economics and Finance
Issue number2
StatePublished - May 2008


  • Employment regulation
  • Foreign direct investment
  • Political economy

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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