The purposes of this study are as follows: First, among factors affecting the change in corporate investment, the effect of employment protection is going to be empirically analyzed. The analysis of how employment protection influences corporate investment requires dynamic panel analysis using data by countries rather than analyses of individual countries due to the nature of employment protection legislation index. Second, major countries which have relaxed their employment protection are selected to analyze such specific institutions and their effects. Based on empirical analysis and results from case studies, this research produces several important findings.

To begin with, in analyzing the relationship between employment protection and corporate investment, the empirical data from 1991 to 2008 is used and a  system GMM estimation method is adopted. The finding from this analysis is that stronger employment protection leads to decrease in corporate investment. The enhanced protection of employment as measured by countries turns out to be a factor causing slides in corporate investment through rising wages and adjusting costs.

Second, when employment is more strongly protected, firms confront greater financial constraints. Furthermore, strengthening employment protection impose tight financial constraints on larger firms while small and medium-sized businesses enjoy relatively lower ones.

Third, tighter protection of employment in each country is negatively related to corporate investment. There is a negative correlation between stronger employment protection which increases labor costs and corporate investment. Fourth, Korea has very high firing costs in the World Bank's Doing Business, ranking 28th out of thirty OECD countries. Firing costs amount to 91 weeks of wages, and prove to have a damaging effect on creating a corporate-friendly environment as well as to push Korea's ranking in the labor regulation area down to a lower level.

How employment protection have an effect on corporate investment is shown in results from empirical analysis, based on which the following important policy implications can be obtained.

First, increasing corporate investment calls for easing employment protection. Higher levels of employment protection are very likely to discourage corporate investment. Therefore, necessary measures include reducing firing costs to impose less tight employment protection. Such measures are expected to bring not only more employment growth but also promotion of corporate investment. Second, necessary policy efforts should be devoted to make the labor market more flexible by lowering the high firing costs. While high firing costs increase rigidity in the labor market and deter new employees from entering the market, they also incur enormous adjustment costs, which can discourage corporate investment. In other words, huge firing costs serve as an incentive for firms to make conservative decisions on investment and employment policies.

Third, flexibility as well as flexicurity need some effort to achieve in the labor market. Reducing employment protection increases labor market flexibility, but also exposes workers to increased employment and income risk. Combining reductions in employment protection with improvements in the social safety net, such as unemployment insurance, can help mitigate the income risk associated with increased job turnover and thus reduce opposition to reform. However, a properly designed unemployment insurance can play a significant role in securing income while also maintaining labor market flexibility and appropriate levels of incentive at the same time.