Labor Law and Innovation Revisited

44 Pages Posted: 7 Nov 2015 Last revised: 13 Jun 2018

See all articles by Bill B. Francis

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Bin Wang

Marquette University - College of Business Administration

Zhengyi Zhang

Capital University of Economics and Business (CUEB) - International School of Economics and Management

Date Written: May 31, 2018

Abstract

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.

Keywords: Employment protection laws; Labor law reform; Corporate innovation; Innovation efficiency; Inventor turnover

JEL Classification: F30, J5, J8, K31, O31

Suggested Citation

Francis, Bill B. and Kim, Incheol and Wang, Bin and Zhang, Zhengyi, Labor Law and Innovation Revisited (May 31, 2018). Journal of Banking and Finance, Forthcoming, Fordham University Schools of Business Research Paper No. 2687196, Available at SSRN: https://ssrn.com/abstract=2687196 or http://dx.doi.org/10.2139/ssrn.2687196

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Incheol Kim (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Bin Wang

Marquette University - College of Business Administration ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Zhengyi Zhang

Capital University of Economics and Business (CUEB) - International School of Economics and Management ( email )

Beijing
China

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