Supporting Information
Appendix S1: Technical Discussion
When L < LB , the government knows that both sincere and opportunistic investors have incentives
to make an investment. The updated belief that the investor is the sincere one, β, is thus equal
to the prior belief, α. Expecting both types of investors to make an investment, the government
enforces the labor laws if and only if
L³
c
E(D)(1 - a )
When L ³ LB , the government knows that the sincere type stops investing. So when the
government observes investment made, it updates its belief that it is facing the sincere type, β = 0.
In other words, the government is sure that it is facing the opportunistic type and enforces the labor
laws if and only if
c
E(D)
Note that c/E(D)(1-) is always greater than c/E(D)1 The equilibrium depends on how LB locates
L³
in relation to c/E(D)(1-) and c/E(D). One possible case is LB < c/E(D) < c/E(D)(1-). When this
is the case, the government does not enforce when L < LB and both the sincere and the
opportunistic investors invest. When LB < L < c/E(D) , only the opportunistic investor invests, and
the government decides not to enforce the labor laws. When c/E(D) < L, the government starts to
enforce the labor laws, making the opportunistic investor discontinue its investment. This case is
graphically illustrated in Figure 2(a). The x-axis denotes L.
Another possible case is c/E(D) < c/E(D)(1-) < LB.2 When this is the case, the government starts
to enforce the labor laws when L > c/E(D)(1-). Both types of investors continue to invest until L =
LB. When L > LB, given that the government is willing to enforce the labor laws, both types of
investors discontinue their investment. The discussion is succinctly captured in Figure 2(b).
The equilibria are summarized in Table 2.
1
2
c
c
> 0. This is always the case given that c > 0, E(D) > 0, α < 1.
E(D)(1 - a ) E(D)
There is another case where LB sits between c/E(D) and c/E(D)(1-). This is a trivial case that
does not yield any substantive insight, thus it is dropped from the discussion.
Appendix S2: Robustness Checks
TABLE 6. Robustness Checks: Models 1-3 with FDI Stocks
∆ FDI Stocks
FDI Stocks
–
Labor Gap (1)
Labor Gap (2)
-0.05*
(0.025)
-0.04
(0.03)
FDI Stockst−1
Labor Gapt−1
-0.10**
–
(0.03)
0.04*
-0.82**
∆ Labor Laws
-0.07*
(0.03)
–
–
Labor Lawst−1
∆ Labor Practices
-0.04
0.00
(0.07)
(0.04)
–
–
–
–
Labor Practicest−1
∆ Market Size
0.06
-22.34
(0.06)
(41.39)
–
–
–
–
Market Sizet−1
∆ Trade Openness
6.87
4.45**
(2.19)**
(1.74)
–
–
–
–
Trade Opennesst−1
∆ Wealth
0.35
-19.19
(1.00)
(23.86)
–
-5.79
–
-4.83
Wealtht−1
∆ Growth
-4.71
0.27
(2.61)
(0.33)
0.59
–
Growtht−1
∆ Fuel Exports
0.22
-0.07**
(0.33)
(0.03)
–
-0.02
Fuel Exportst−1
∆ Democracy
-0.04
-0.05
(0.03)
(0.08)
Democracyt−1
∆ Physical Integrity
-0.02
–
(0.07)
Physical Integrityt−1
∆ Civil War
(0.02)
(0.04)
(3.70)
(1.93)
0.04*
-0.82**
1.15
–
(0.02)
(0.05)
(3.93)
(2.05)
(0.02)
–
-0.02
(0.02)
-0.01
-0.55
(0.01)
(0.61)
-0.02
-0.04
(0.01)
(0.06)
-0.41
-0.31**
(0.83)
(0.09)
0.01
-0.28**
(0.05)
(0.09)
–
–
-0.55**
-0.55
(0.15)
(0.61)
-0.51**
-1.17*
(0.15)
(0.54)
Civil Wart−1
∆ Bureaucratic Quality
–
–
-0.41
(0.83)
–
-0.71
-4.87
(0.81)
(2.64)
Bureaucratic Qualityt−1
∆ Labor Participation
–
–
–
0.12
(0.24)
-4.16*
0.05
(2.11)
(0.23)
-0.22*
11.90
(0.09)
(16.84)
-0.19*
7.59
(0.09)
(17.92)
Labor Participationt−1
Constant
Obs.
Countries
R2 (within)
–
-127.41** (33.89)
1189
100
0.12
1194
95
0.43
1097
82
0.43
Notes: Standard errors in parentheses. All models estimated with country fixed effects.
Two-tailed tests. p-value * < .05, ** < .01.
Appendix S3: Instrumental Variable Regression
TABLE 7. Instrumental Variable Regression for Model 1
Dependent Variable
FDI Inflowst−1
Labor Laws
Labor Practices
Market Size
Trade Openness
Wealth
Growth
Fuel Exports
Democracy
Constant
Obs.
Countries
R2 (overall)
DV:FDI Inflows
0.24**
(0.05)
-0.77†
(0.46)
0.09*
(0.05)
-4.10
(4.25)
-0.16
(0.81)
5.13
(4.19)
0.02
(0.02)
-0.02*
(0.01)
0.11
(0.07)
75.53
(81.99)
1309
100
0.03
Notes: Standard errors in parentheses. All models
estimated with country fixed effects. Two-tailed tests.
Appendix S4: Countries in Sample
Algeria, Angola, Argentina, Bahrain, Bangladesh, Benin† , Bhutan† , Bolivia, Botswana,
Brazil, Burkina Faso, Burundi† , Cambodia† , Cameroon, Central African Republic† , Chile, China,
Colom- bia, Comoros∗ † , Congo, Costa Rica, Cote d’Ivoire, Djibouti∗ † , Dominican Republic,
Ecuador, Egypt, El Salvador, Equatorial Guinea∗ † , Eritrea† , Ethiopia, Fiji† , Gabon, Gambia,
Ghana, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, India, Indonesia, Iran,
Iraq† , Israel, Jamaica, Jordan, Kenya, Kuwait, Lesotho† , Liberia, Libya, Madagascar, Malawi,
Malaysia, Mali, Mauritania† , Mauritius† , Mexico, Mongolia, Morocco, Mozambique, Namibia,
Nepal† , Nicaragua, Niger, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru,
Philippines, Qatar∗ , Rwanda† , Saudi Arabia, Senegal, Sierra Leone, Singapore, Solomon
Islands∗ † , South Africa, South Korea, Sri Lanka, Sudan, Swaziland† , Syria, Tanzania,
Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Uganda, United Arab Emirates, Uruguay,
Venezuela, Vietnam, Yemen, Zambia, Zimbabwe
Excluded from Model 1, ∗ Model 2, † Model 3