DP3152 Multinational Investment, Industry Risk and Policy Competition

Author(s): Jan I. Haaland, Ian Wooton
Publication Date: January 2002
Keyword(s): entry, exit, investment subsidies, multinational firms, uncertainty
JEL(s): D92, F12, F23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3152

In an uncertain business climate, multinational enterprises must take account of future exit costs in deciding where to locate a branch plant. We study how differences in national labour-market conditions between countries influence this decision. Other things equal, the most attractive location has a flexible labour market (low closure costs) together with a low opportunity cost of employment (high unemployment). In a game between two countries, a nation with an inflexible labour market and high unemployment will succeed in attracting low-risk firms, while that with more flexible labour markets and low unemployment will win the game for higher risk firms.