Employment Protection, Flexibility and Firms' Strategic Location Decisions under Uncertainty

We construct a model in which oligopolistic firms decide between locating in a country where employment protection implies costly output adjustments and in one without employment protection. Using a two-period three-stage game with uncertainty, we demonstrate that location is influenced by both flexibility and strategic concerns. The strategic effects under Cournot work towards domestic anchorage in the country with employment protection, while those under Bertrand do not. Strategic agglomeration can occur in the inflexible country under Cournot and even under Bertrand, provided that uncertainty and foreign direct investment costs are low. © 2012 The London School of Economics and Political Science.