The effect of employment protection legislation on the internationalization of SMEs and their participation in global value chains

A substantial body of economic literature has examined the impact of employment protection legislation (EPL) on various firm-level outcomes. We complement this literature by studying the impact of reducing employment protection on the internationalization of small and medium-sized enterprises (SMEs) and their participation in Global Value Chains (GVCs). Exploiting a comprehensive survey on Italian firms, we first assess how firms’ engagement in complex international activities has been affected by the 2012 Labor Market Reform, the so-called “Fornero Law”, which reduced firing costs for firms above the 15-employee threshold. Then, we evaluate the impact of the same reform on firms' participation and governance structure in global value chains. We find a positive effect of EPL retrenchment on complex international activities of SMEs. We also highlight that the positive effect on internationalization is greater in firms with a higher level of volatility. Finally, we find a positive effect of the reduction in EPL on firms’ participation in GVCs, particularly in a governance mode characterized by short-term relationships with foreign companies.