Unions and the welfare impact of foreign direct investment - A wisdom extension

Abstract

This paper extends the recent literature, e.g. Leahy and Montagna (Economic Journal 110: 80-92, 2000), in relation to the link between unionization, inward foreign direct investment (FDI) and country welfare in an oligopoly market structure. It is shown that the common results, that unions may reduce welfare under FDI while multinational enterprises (MNEs) will strictly trade off union wages at each location, are generally driven by the assumption relating to the scope of the bargaining with the union, namely the 'right to manage' (RTM). In particular, our extension to efficient bargaining (EB) demonstrates that union power may increase welfare in the presence of FDI, while the MNEs' choice between FDI and exports will include profit-sharing arbitrage with unions, in addition to the usual wage comparison considerations.