| Summary: | A large number of studies have shown that contribution of exporters to economic growth and development is much higher than non-exporting firms. This evidence has lead governments to improve their trade policies in order to increase foreign exposure of firms. However, improvements in trade policies can only be fully effective when they are complemented with other regulatory reforms that improve the investment climate for firms. This study focuses on a particular aspect of investment climate, namely employment protection legislation, and shows how these regulations discourage firms from exporting. Using a rich set of firm level data from 26 countries in the Eastern Europe and Central Asia region, the author shows that firms that cannot create new jobs due to restrictive labor regulations are less likely to export. Evidence shows that firms that plan to export expand their size before they start to export. However the rigidities in labor markets make this adjustment costly. Higher costs of labor decrease operating profits and lead to a higher threshold value of productivity required for entering export markets. As a result, a smaller fraction of firms chooses to export
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