Do a country’s labour regulations shape the inflow and outflow of capital? Do firms boost profits and stock returns by seeking out countries with weaker labour regulations in which to make investments?
Ross Levine and Chen Lin do the math;
We find an economically large and statistically significant connection between labour regulations and both abnormal stock returns and profits in exactly those industries in which theory suggests the relation should be most pronounced – labour dependent industries.Knock us over with a feather!
The estimated impact of labour regulations on the profitability of cross-border acquisitions [i.e. investment in a foreign country] is large, indicating that stronger labour regulations in the target country make post-merger integration more costly and reduce the manifestation of synergies.In English, profit seeking investors prefer to put their money where it has the best chance of success. Benefiting both the investors and the workers in those 'weakly' regulated countries.