Labor law and innovation revisited

This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels...

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Bibliographic Details
Published in:Journal of banking & finance 2018-09, Vol.94, p.1-15
Main Authors: Francis, Bill B., Kim, Incheol, Wang, Bin, Zhang, Zhengyi
Format: Article
Language:English
Subjects:
Corporate innovation
Employment protection laws
Inventor turnover
Labor law reform
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Summary:This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in (1) firms that heavily rely on external financing, (2) firms that have high R&D intensity, (3) manufacturing industries, and (4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2018.06.007