Domestic Competition and Foreign Direct Investment in Unionized Oligopoly

It is often argued, though mostly informally, that outward foreign direct investment (FDI) is a synonym for the export of employment and thus detrimental to the home economy. To see whether and under what conditions this intuition indeed holds true, we construct a model of unionized duopoly and examine welfare implications of outward FDI by paying special attention to the role of domestic competition. We find that the welfare effect of FDI is largely non-monotonic, and there are indeed such things as "excessive FDI." We also show that, when FDI reduces welfare, this negative effect arises more at the expense of consumers rather than the unions: in fact, quite contrary to the popular belief, FDI may actually benefit the unions because it serves to soften price competition between them. The paper points out that welfare effects of outward FDI hinges crucially on the nature of domestic competition, and policymakers must carefully take this aspect into consideration.