Labor disputes and the economics of firm geography: A study of domestic investment in India

Rapid economic growth is perceived as a panacea for developing nations. Hence, in the interest of increasing the pace of development, countries have begun to reexamine the way they do business. Governments in developing countries talk about reforming laws and removing roadblocks in order to usher in a golden age of domestic and foreign investment. Reforms in various spheres, including the financial sector, taxation, agriculture, industrial policy, pollution regulation, infrastructure, intellectual property rights, and labor laws, are needed to enhance global competitiveness. A detailed study of this issue is important in order to get a clear view of the link between regulations and investments. In this article, we study the effect of labor conflict and formal labor laws on new investment in the various states of India. We find that labor disputes and pro-worker legislations inhibit location choice and new investments. © 2005 by The University of Chicago. All rights reserved.