Domestic Labor Markets and Foreign Direct Investment*

Abstract

We study how the labor market and industry uncertainty affect the investment decisions of multinational enterprises (MNEs). In an uncertain business climate, MNEs must take account of the future in deciding where to locate a branch plant. When wages are endogenously determined, both the opportunity cost of labor and redundancy payments influence the MNE's decision. When countries compete for foreign investment, different national characteristics determine the winners in different industries. Differences in risk may draw MNEs to different locations. Firm-specific bargaining always offers an advantage, as the mix of current and future pay fully reflects the firm's risk profile. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd.

Employment Protection Legislation, Multinational Firms, and Innovation

“…We have assumed this situation away by interpreting EPL as regulation that results only in a (bureaucratic) firing cost to the firm and not a transfer to the worker. However, EPL as redundancy will affect location decisions if wage bargaining is conducted at the industry level rather than at the firm level and the probability of bankruptcy is private information to the firm and is different to the industry average (Haaland and Wooton 2003). The worker, taking into account the probability of receiving a redundancy payment, accepts a low (high) wage if the industry average riskiness is high (low).…”

“…7 See, inter alia, Dunning (1977), Caves(1996), Ekholm and Hakkala (2007), Devereux and Griffith (1998). Haaland and Wooton (2003) show that multi-national enterprises will locate high risk projects in countries with low redundancy costs in the presence of industry or economy wide wage bargaining, and when the risk profile of the MNE is different to that of domestic firms. 8 Both Storm and Nastepaad (2007) and Buchele and Christiansen (1999) find that high EPL is associated with greater productivity growth.…”

Globalisation and union opposition to technological change

“…In principle, these trade costs can include both tariff and non-tariff cost components. We further assume that the labour market in country 1 is unionised, whereas the firm located in country 2 can recruit workers from a competitive labour market at a wage rate w 2 = w. 17,18 For simplicity, we 14 An analysis of the Bertrand case is available in the Working Paper version, available at http://skylla.wz-berlin.de/pdf/2003/ii03-18.pdf 15 The segmented markets oligopoly model was made popular by Brander and Krugman (1983). Neary (2003) presents a general equilibrium picture of international oligopoly with segmented markets.…”

“…17 Early contributions to unionised oligopoly models include Brander and Spencer (1988), Dowrick (1989) and De Fraja (1993). 18 Lommerud, Meland and Sørgard (2003) and Straume (2003) are other examples assume that the outside wage (that can be earned outside the oligopoly industry) for workers in country 1 also equals w. To save notation, we set w 1 = w. We adopt the monopoly union model, where the trade union in country 1 freely chooses the wage at a stage prior to the Cournot subgame. 19 Union preferences are characterised by the following Stone-Geary-type utility function:…”

“…Firms may then in various ways be able to bribe workers to of international oligopoly models with asymmetric union power across countries. Naylor (1998Naylor ( , 1999 and Haaland and Wooton (2003) study situations where unions are equally powerful in all countries. 19 For tractability reasons, the combination of linear Cournot oligopoly and monopoly unions is commonplace in the literature on unionised international oligopoly.…”