Fancy a Stay at the ‘Hotel California’? The Role of Easy Entry and Exit for FDI


  • Earlier versions of the paper were presented at a DNB conference in Amsterdam, the EIIT 2003 meeting at Purdue University and seminars at the World Bank, Madrid and Nottingham. I am grateful to Tamim Bayoumi, Eugene Beaulieu, Spiros Bougheas, Richard Disney, David Greenaway, Aoife Hanley, Jim Hines, Wolfgang Keller, Peter Neary, Franz Palm, Howard Shatz, Beata Javorcik, Eric Strobl, Alan Taylor and Ian Wooton for helpful comments and suggestions. I would especially like to thank Jack Mutti for kindly sending me unpublished data on effective tax rates and Mary Amiti for making the WEF data available to me. All remaining errors are, of course, my own. Financial support from the Leverhulme Trust (Programme Grant F114/BF) and the European Commission (Grant No. SERD-2002-00077) is gratefully acknowledged.


Investment incentives targeted at attracting multinational firms have been extensively researched, and empirical evidence has shown them to be influential. The same is not true of exit restrictions. Yet, as recent theory suggests, there may be a trade-off between entry incentives and ease of exit. This paper focuses on that trade-off in the case of US multinationals in 33 host countries. An indicator of labour market regulations is used as a measure of ease of exit. Results suggest that both entry incentives and labour market regulations are important and ignoring the latter neglects an important dimension in firms' location decision.