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.
Francis, Bill B., Incheol Kim, Bin Wang, and Zhengyi Zhang. “Labor Law and Innovation Revisited.” Journal of Banking & Finance 94 (September 1, 2018): 1–15. https://doi.org/10.1016/j.jbankfin.2018.06.007.
Journal of Banking & Finance