DP2260 Unionisation and Foreign Direct Investment

Author(s): Dermot Leahy, Catia Montagna
Publication Date: October 1999
Keyword(s): FDI, Strategic Behaviour, Unionisation
JEL(s): F16, F23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2260

This paper investigates the effects of different degrees of wage setting centralisation on (1) the incentive of a MNE to locate in a host country, (2) the optimal level of investment it decides to commit to its foreign operation, and (3) the host country's welfare. Decentralised and centralised wage bargaining are considered. The nature of product market competition between the MNE and domestic firms affects results that cast doubt on some of the conventional wisdom on FDI. In particular, we show that: (i) it is not always welfare improving to attract inward FDI, and (ii) the MNE may prefer centralised to decentralised wage setting regimes.