Abstract
Competition for global capital is often used by policy makers to justify streamlining employment protection regulations. We assess this claim by examining whether access to lightly regulated foreign labor markets provides multinational firms with tangible financial benefits – specifically, a low cash holdings requirement. Using a novel dataset of foreign subsidiary presence of firms from around the world, we show that multinational firms hold proportionally less cash than their domestic-oriented peers. This gap narrows after a labor reform at home attenuates multinational firms’ relative advantages, especially if they have current operations in countries with weak employment protection. Our evidence suggests that labor regulation arbitrage is an important driver of multinational activities.